ABB Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: ABB LTD. (ABB)

ABB (NYSE:ABB)

Q1 2013 Earnings Call

April 24, 2013 9:00 am ET

Executives

Joseph M. Hogan - Chief Executive Officer

Eric Elzvik - Chief Financial Officer and Executive Vice President

Analysts

Ben Uglow - Morgan Stanley, Research Division

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Mark Troman - BofA Merrill Lynch, Research Division

Daniela Costa - Goldman Sachs Group Inc., Research Division

Simon Toennessen - Crédit Suisse AG, Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

Sébastien Gruter - Societe Generale Cross Asset Research

James Moore - Redburn Partners LLP, Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

William Mackie - Berenberg Bank, Research Division

James Stettler - Canaccord Genuity, Research Division

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB First Quarter 2013 Results Analyst and Investor Conference Call. I'm Julia, the Chorus Call operator. [Operator Instructions] At this time, it's a pleasure to hand over to Mr. Joe Hogan, CEO of ABB; and Mr. Eric Elzvik, CFO of ABB. Please go ahead, gentlemen.

Joseph M. Hogan

It's Joe and Eric, and thanks for joining the call. And good afternoon to everyone. As always, our comments on the call, you can refer to the presentation that's on our website at abb.com. Let me call your attention to Chart 2, and that's our Safe Harbor statement. And I challenge anybody to find the change in that for the last couple of quarters, I guess.

Moving on to Chart 3. We feel good about the quarter, overall, from an operational standpoint and also from a strategic standpoint, too, and we'll talk more about that. Given the uncertainties in the global economy, we feel that we performed as we should have and as we'd planned. We continue to execute well and we're balancing solid cost discipline and that we see across the portfolio with targeted growth in businesses in regions where we have competitive advantages, especially in areas like industrial efficiency, power reliability and renewable energy.

Our balanced portfolio and global footprint contributed to the resilient performance overall, allowing us to find and capture growth opportunities in a mixed market. For example, we won some key orders in marine and mining and robotics, and increased emerging market orders by double-digits by 10%. We lifted total revenues on both an organic and an inorganic basis. Our execution on cost remains strong with very tight discipline on our G&A expenses. Continued success in sourcing and productivity improvements saved us about $260 million in the quarter.

The Thomas & Betts integration and synergies were on track. We're very pleased with this acquisition and the improved balance it gives us in the North American marketplace. Power Products team turned in another very good performance with an operational EBITDA margin of 14.9%, again, within our guidance of 14.5% to 15% for the full year. Thanks to solid execution on cost and selective growth initiatives in more profitable end markets. And we announced the planned acquisition of Power-One earlier this week to tap what we think will be one of the most dynamic and attractive Power markets in the future, with solar inverters and it plays right into the combined strengths of automation and power as we described earlier this week.

Moving onto Chart 4 and looking at the quarterly overview. I already mentioned the mixed demand environment that we see out there, which you can see reflected in our topline numbers. We generated a solid increase in operating earnings and margins. This is partially due to an easier year-on-year comparison. As you recall, we saw some weakness in the first quarter last year, but also the result of ongoing efforts to target more attractive end markets; to improve our service offerings; and to be more selective on the kinds of projects we take, especially in Power.

And also, thanks to our continued success in balancing growth and cost, which is the foundation of our strategy, our execution on costs remained strong in the first quarter with tight discipline on G&A expenses, continued success in sourcing and productivity improvements, again, saved us $260 million. Eric will break that down for you in a moment.

We also achieved these results despite continued demand headwinds. Growth in the U.S. decelerated further in the quarter and industrial investments in much of Europe remained mixed. Cash flow was lower than we'd like, but it's largely expected and mainly reflects the timing of project execution, so we expect to see a recovery in the coming quarters as we always do at ABB, given the cyclical nature of our cash.

Moving on to Chart 5. This chart highlights what we think is a key competitive advantage for ABB, namely our varied, balanced business and geographic scope. For example, we now have some 60% of our business now coming from the Automation side, which helps us take up some of the slack that we've seen in the Power cycle. Similarly, we've enhanced our presence in North America and that's contributed to the resilience of our results. And the share borders from a strong emerging markets' presence is again returning to near 50%, 48% of total orders in Q1. This has helped mitigate much of the market turbulence and allowed us to tap opportunities for profitable growth.

Moving on to Chart 6. Here's a look at the regional highlights in some of our key industries. Starting with the Americas, orders were lower on an organic basis. That mainly reflects the tougher comps that we had versus Q1 last year in North America, especially in our Power business. As I mentioned earlier, we saw a continued year-on-year deceleration on order growth in the United States in Q1. On the other hand, compared to Q4, and that's 2012, on a sequential basis, automation orders in the U.S., and that's excluding Thomas & Betts, are showing some modest growth. We have to wait and see how this develops over the rest of the year, but we think that's a good sign.

Europe was also, again, a very mixed bag. This quarter, we saw strong improvements in Eastern Europe; Poland, Lithuania, HVDC, large order link; and Russia, mine hoists. These offset weaker orders in some of our traditional Western European markets like Germany and Switzerland. However, we also saw good growth in countries like France in our Power business and the Netherlands in all of our divisions except for PA.

So again, it's difficult to draw any general conclusions. The only conclusion I'd draw from the European discussion is that we have really good diversification from what we can sell in Europe, and you can see that on our portfolio, that we can drive in the kind of economic environment over here that we're seeing that we have just minus 1% in orders, relatively flat, I think is a great tribute to the diversity and the work of the team here.

Asia also improved the results. China returned the demand levels of 2011 after a softer 2012 1Q. In the Middle East and Africa, our strong presence in South Africa helped us to offset [indiscernible] some of the weaknesses in other parts of the Middle East and Africa.

Moving onto Chart 7. Here are just some key orders, and I don't want to walk through each one, but what I hope you see through this is just the diversification in region and also product line that we have in these different orders, and you see it across the Automation portfolio and also the Power portfolio, too.

Moving to Chart 8. And that's just a look at orders in revenue by individual divisions. So when you look at DM, revenues reflect execution of a strong order backlog, especially in robotics, and service revenue is up 5%. In LP and low-voltage products, really steady organic -- we mean almost flat to one up. And this is our earliest cycle business, and no matter where we are around world, it's our biggest heads up in the sense of where economic activity is going, and so we see it relatively flat in that sense.

Process Automation, higher mining and marine orders offset weaknesses in other sectors. We get a lot of questions on how we're doing from a marine standpoint in a down marketplace, and our comments are a lot of the marine that we do in PA has to do with oil and gas and offshore, and that's why we've been able to tap into that sector that has some robust investment.

On PP, order selectivity in a challenging market overall. So Bernhard and his team were just, given the quotations that are out there today and the diversity of our product line and also our global footprint, we're able to pick the jobs that we like and there's enough robustness in the jobs out there that allow us to do that. On PS, we talked extensively with you in the fourth quarter about our PS reset. You're starting to see some of the benefits of that with the 8.3% for the quarter, overall, we'll talk about it in a moment. But it's also reflected in the orders being down in the sense that we're going to be more selective in the jobs that we take. And overall, you'll see this balance out as we go through the quarters in the year.

So moving on to Chart 9, which is -- basically, when you look at the operational EBITDA and operational EBITDA margin, you can read through this yourself, too, but we have higher revenues in DM, a little less favorable mix. And what we mean by that is that you have both medium-term and short-term products in the portfolio of DM. Right now, we have more of the medium-term coming in and that does give us a little bit of the shift in mix and a shift in margin side.

LP, margin is up organically on improved cost control and better capacity utilization. PA improved project execution and higher full service margins. And in Power products, really favorable business mix and price pressure is mostly offset by cost savings. That team continues to execute well. And PS, we just talked about that.

So with that, I'll turn it over to Eric, and he'll walk you through the waterfall.

Eric Elzvik

Yes. If you take a look at the EBITDA bridge we have here a presentation, which reflects the factors that impact our operational EBITDA. Performance has been slightly changed from the last quarter. You see in the first column, the net savings, the price pressure combined with the cost savings, that's the way we like to see it. And you can see we were successful to get a net effect out of that with more savings than price pressure in this quarter.

Looking at the volume effect. So despite the limited revenue increase, we have a positive effect from the volume as we have kept the expenses under tight control. So $115 million improvement comes from there. Looking down further to the mix, that is negative and it's mainly within the divisions. There's a different mix between projects and products, geographies. There's a big variation in different places, but net to that is a, slight pressure on the mix. And as you can see, Other is almost nothing before arriving at the $1,360 billion and then adding the T&B contribution, bringing us to the EBITDA margin of 15.5% -- 15.0%, as you can see.

Looking at the EPS slide on Chart #11. You can see that we had a, under net income, a reduction of 3%, but if you consider the amortization and the timing difference is mainly from derivatives that we book from an accounting point of view every quarter. We had actually an operational net income before amortization and improvement of the earnings per share of 16%. So we think that's a good reflection also on how the operational EBITDA has improved during the period.

Turning to Chart #12. This is the update on Thomas & Betts. Integration is on track, we had a strong start in the year with stable revenues, roughly $590 million with about $100 million operational EBITDA; margin at 16.6% versus 18.1% a year ago. That's against a strong comparable and also some of the mix impacts on Thomas & Betts. But overall, integration is well on track. We are starting to get these cost synergies and also some early signs of the revenue side. The special items on amortization stays unchanged from before, so there's no change on the guidance on that side.

Continuing to Chart #13. On the cash flow, you can here see that the regional cash flow was lower than last year. That's mainly due to timing of project payments and as well as the cash impact from the PS reset. We have a seasonal effect on cash flow, the first quarter is always weaker. And this year was specifically even perhaps more weak than the normal cycle because of those effects.

All in all, the net working capital is at 16.4% and we continue to work hard to improve this and foresee that we will have stronger cash flow in the coming quarters.

Joseph M. Hogan

And so moving onto Chart 14, the technology innovation chart. We just want to show you just some of the products that have been successful for us recently. We announced that 1,000 kilowatt central solar inverter. And so when we do a deal, as we have with Power-One recently, as we've mentioned, we do it from a standpoint of really understanding the market better than we did 3 or 4 years ago. And so as we go into that acquisition, we understand the technology, the regions, some of the grid codes and different things it's responsible for, and that's why we feel we could accelerate our efforts there. But that acquisition made a lot of sense at this point in time.

On right-hand side, the launching of our first DC grid on a ship, Norwegian offshore supply vessel. This is where about 20% of the energy is saved and a huge amount of cargo space that's saved by going with DC. We want to look at the trends translating that into other marine applications that are intermittent like this that allow for that kind of technology.

Our low-voltage breaker, which is our Emax breaker, that's listed down below on the left-hand side. This is a product that we showed at the recent Hanover Fair and it's an interesting product in a sense that it has 61850 code in it and a sense communications of this, and being able to do different load shedding. And it's kind of an obvious invention that we really hasn't been done before as to the really combined load shedding with a breaker and it got a huge amount of attention at the Hanover Fair because it can save energy prices -- energy costs significantly in a short period of time. And you do that because when the breaker is ready to break, it just says, "Hey, this load is going to overpower me, so why don't we reduce that and balance the load." It's kind of a -- it's almost a monitoring system on a subsegment level, which is -- we're pretty excited about this across-the-board and some of the payback periods we see for customers are less than 6 months on this, so it gives us a good sales cycle too.

On right-hand side is a gearless conveyor mill drive. And so when we talk about some of the success we've had in the mining industry lately, some of it has been with the -- our gearless mill drives and also with mine hoists, and these are big pieces of mechanical equipment that ABB has very strong positions in. And as -- I think we're not looking at a lot of greenfield mining right now, given what's going on with commodities. What we do see in the mining industry is a strong force towards productivity and really sweating the assets that you have in those mines, and we feel we can play into that cycle pretty well.

So moving to the next chart, which is the demand outlook. And in 2013, we really went by region here, and I think as we look at some of the other competitors on our segment that are talking out there, we don't think we're materially different from what we're seeing out there and our market, too. So in Americas, I mean, we're -- we get these arrows that kind of slide up up in Power and Automation, and we'll see how the market develops. I think as we see the construction cycle in America begin to tick up, that gives us some hope, particularly on our shorter-cycle businesses.

On the European side, it's still uncertain. It is a 2 speed economy. You saw the strength that we had in the Eastern economies, but still pressure in the West. We have to see how that develops. Middle East and Africa is mixed also, but we still see a pretty good spend from a Power standpoint in the Middle East area, and then different resilience in parts of Africa, too.

On the Asian side, we had a good quarter in China. We had some, I think, tough comparables in India, particularly on the Power side, but Automation is hanging in, in that sense. And so overall, I think, again, the economies we're seeing right now are not a lot different from what we anticipated in our budgetary process. It's just an uncertain economy that's flat and maybe some momentum in some of the economies and we're prepared to execute in that environment. And first quarter is pretty indicative of how we feel that we'll be able to address it.

So on the last chart, I think our outlook here just remains relatively unchanged. There's no clear signs in demand trends in the sense as we head into the sec quarter -- second quarter 2013 that will be materially different from what we've seen, really in the fourth quarter of 2012 and the first quarter of 2013.

Nevertheless, we feel good about our strategic position and our operation position, and we think that we can compete and perform very well in the economic cycle that we're encountering out there. So with that, we'll turn it over for any questions that you might have for Eric and me.

Eric Elzvik

We also have to say that we have added in the package on the web, the presentation package, also the divisional order backlog in the back. There has been questions during the day on that, and it is now available on the web.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Ben Uglow from Morgan Stanley.

Ben Uglow - Morgan Stanley, Research Division

A couple of questions. First of all, can you give us a bit of general color on the order growth in China, both from the power and automation side, but actually I'm most interested in what you're seeing in the kind of what I call the factory environment. I presume that low-voltage is doing okay, but we've had very different messages over the last couple of weeks from Siemens, with their automation business in China, who felt things were getting tougher and Schneider who felt things were bottoming out. I wondered what your take was on sort of classic factory automation demand in China during the quarter. So that was question number one. Question number two, can you give us just a bit more of a sense of this mix effect in Thomas & Betts? The reason being, I mean, the EBITDA margin has come down from over 18% to 16.5% on stable revenues. What is it in Thomas & Betts' portfolio, is there a product category or a particular driver that's leading to those slightly softer margins?

Joseph M. Hogan

Ben, I'll start with the mix effect in T&B. Last year, they had a very good quarter. Remember, they didn't really consolidate until the second quarter of our side. They had a really good quarter in steel structures and a higher margin and -- significantly, and versus this quarter. We're not in trouble, we're still in double digits in that business and all. It was just inordinately high last year. And that's the biggest mix factor from quarter-to-quarter. We'll be seeing that business, from the electrical standpoint, is very good. Again, we're seeing some increase in this construction cycle that is reflected in there, also that helps. And so that's -- when we mention mix, Ben, that's the biggest mix factor that I can give you that makes sense there.

Ben Uglow - Morgan Stanley, Research Division

Okay. And does that continue throughout the year, Joe? I mean...

Joseph M. Hogan

No. I don't believe so. We have a good, strong backlog in that business, overall, for about 2 or 3 years. It's just -- just like in our Power Products division, Ben, there's some good margin and there is bad margin, you kind execute through it. And we feel very confident that it'll perform on a level this year as it did last year in total. And I'll let Eric handle the China question.

Eric Elzvik

Thank you. And so on our side, the low-voltage business is showing some signs of improvement, but not so strong signs of improvement. And then also, on the -- this is Automation division as a whole, it is a positive development in China, specifically robotics, continues a strong trend in China.

Joseph M. Hogan

Ben, I'm going to probably make a mistake here if I give you a little bit of color, okay? I'd say when you look at Siemens' portfolio, they're pretty strong in medium-voltage drives in China and they don't have a robotic -- a robots platform, okay? We're strong in low-voltage drives, we have a robotics platform. So it's a really hard comparison when you look at the economic cycles across the 2 businesses. And so I mean, we're going to get different looks. Robots continue to be strong in that area, and our low-voltage drives business have a little bit of life into it, this quarter versus what we had last year. And so I think it's a hard apples-and-apples comparison. When Siemens says one thing and us another, it reflects a different part of the Chinese economy. So when you're looking at -- you said you want to understand the manufacturing base, those are 2 things in DM. Robots and low-voltage drives. But I would tell you that would represent that segment of it pretty well.

Operator

The next question comes from Andreas Willi from JPMorgan.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Two questions, please. The first one, on your outlook for the U.S. You, like other companies, are still more positive on the U.S., overall. Your arrows still point up for 2013. But ABB, like many other industrial companies, actually had pretty weak Q1 orders or business trends. In the U.S., you were down 12% organic -- 16% organic in U.S. on orders. Maybe if you could just give us your insights into what do you think is going on in the U.S. industrial and on the Power side. And what is needed to turn that around? Do you think you too will not be very different? Are you banking on a big second half, basically, in the U.S.? And the second question, in terms of pricing on the transformer side or the Power Product side, you talked this morning on the press call that kind of order pricing is still minus 2% to 3%, which is pretty similar in recent trends. With commodities now coming off and with products, like transformers, carrying a lot copper, oil and steel, how are you going to communicate with the markets going forward, given kind of the changes you make out [ph] on net and gross pricing given the commodity impact?

Joseph M. Hogan

On your first part, on U.S. economy, remember, we're all kind of feeling this thing right now, trying to figure out what it is. I'd say, last year, we had a really good Power performance in the first quarter, and so when you look at Power to Power, it was down. I don't think inherently, there's a big change in the Power market in the U.S. between the years -- when you look at the CapEx that's projected from a utility standpoint in the United States. It stayed pretty stable from year-to-year. And so I -- Andreas, I'm not down on it. I think on the power side, we should see a reasonable year there. I'm not talking about any big upsides in the second half or anything like that, but I would talk about stability there. On the automation side, it's -- we really get our look through -- a lot of our look through Baldor and T&B. And in T&B, we saw stronger orders in the second part of March and we saw a lot of weakness in January and the early parts of February. Andreas, again, I'm going to speculate for you, and you can do what you want to with it. I think there was a lot of -- there's a couple of things you have to consider from a macroeconomic standpoint. One is, towards the end of the year last year, I think there's a lot of gymnastics going on with companies, in the sense they're trying to maximize some R&D credits, taxes were going to change in the United States; they were anticipating a lot of those things. And I think that, to a certain extent, contributed to some of the weaknesses we saw in some of the figures in January and February. And this is -- it's a guess, Andreas, okay?

Eric Elzvik

And the first quarter last year was a very strong quarter, so we have to keep that in mind also.

Joseph M. Hogan

Yes. And secondly, I'd say, I think all the mess in the United States, on the sequester and everything else, it just creates a level of anxiety and concern there, but I think it helps to mute a construction cycle that started to gain some momentum in the second half of last year that we were hoping for. And so I think we're all just kind of in a wait-and-see mode right now. We talk about the United States, too. We have to include Canada because we -- there's significant amount of business we do Canada, too. And I think Canada was weak in -- overall, in the first part, but we, again, we saw in March a pick-up in our Canadian business. And so right now, I'd say, we're just cautious. And if I had to guess anything, Andreas, I'd say, think of just kind of trajecting a flat line out, and we're trying to figure out what's the amplitude of this line? Is this going to start to increase as we go through the year or not? We don't know. But we're just prepared to deal with it anyway that it does go.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

And Eric on the PP pricing?

Eric Elzvik

Yes, I'd take the PP pricing. I think we'd rather have a 2% than a 2% to 3%, that's what we quoted earlier today, so somewhere in that region, but rather 2% than 3%.

Joseph M. Hogan

And then you asked about how we're going to handle the decrease in copper prices, and remember, on the copper side, we're hedging ourselves out on transformers and stuff for -- on large Power transformers, so that will take a while to kind of work through our backlog. It's not like we're just playing the market from quarter-to-quarter. On the steel side, I don't know that we've seen any real significant reductions on electrical steel on our contracts. That will begin to come up in the second quarter of this year when we renew those things.

Operator

The next question comes from Mark Troman from Bank of America Merrill Lynch.

Joseph M. Hogan

Mark, we're having a tough time hearing you. Do you have a speaker phone or something?

Mark Troman - BofA Merrill Lynch, Research Division

Let's try that. Is that better?

Joseph M. Hogan

Yes, a lot better.

Mark Troman - BofA Merrill Lynch, Research Division

Okay, sorry. Joe and Eric, just on -- 2 questions, please. Firstly, follow-up on pricing. I guess there's always a lot of questions on pricing. Joe, could you just kind of sort of describe what's going on in the overall market on pricing? And to follow up on that, I was interested in your comments about being selective, if you like, within -- especially within the Power Products division. So firstly, what's going on in the overall market? And secondly, how can you differentiate away from those market trends, I guess, and be more selective, give a few examples of that and what's going on? And second question, mining, you put some examples in the pack like mill drives and things. I mean, obviously, mining is a tough market for the -- on the OE side for a lot of the equipment suppliers and we're seeing greenfield weakness, clearly. What gives you confidence that you can kind of keep going in the mining area, or -- is it a low penetration or just you're offering good paybacks on the sort of productivity you're offering? I'm just intrigued to hear what your thoughts are on how you can sell well in the mining space.

Joseph M. Hogan

I want to start, Mark, on the mining side, just to stay there. I don't claim to say that I can see the future in this sense, but we've been pleased with the level of CapEx that we've seen in these kinds of things like mine hoist and gearless mill drives. And remember, they're around ore bodies. So you see them around -- you'll see it specifically around copper, around nickel, things that really -- that have been precious, and even though the costs or the prices come down from a commodity standpoint, there still is historical reasonable highs from a return standpoint. So what the mining companies tell us that the ore bodies are not as rich in specific minerals as what they've in the past, so they have to pound them harder to get them out, and that's what a gearless mill drive does. It just takes a bunch of rocks and cracks them up and take it down to the ore body and then you distill it. Mine hoist just means you're going lower or you're venting your mine. So it just says that they're working the mines harder. And I think we've seen the whole issue with the write-offs of what went on in the mining industry last year, the changing of a lot of the CEOs and leadership there, and I think the leadership teams that are put in place around the mine companies today. And I'm not talking, Mark, at all about coal. Okay, coal has its own separate cycle. I'm talking about ore, okay? I think that leadership that's in place is really dedicated in to sweating assets more, not dong greenfield, being more responsible from an operational standpoint and so am I optimistic we can keep this going? I'm not telling you I am or not. I'm just reporting on our performance so far and the reason for it and some of the underlying drivers for it, and we certainly hope that it does. On the pricing, the overall market. On power products and selectivity, this is what I can just tell you, the more -- one of the things that we have talked to you guys a lot about is the difference of power products because of the breadth of our product line and the breadth of the geography that we compete in. So we see a lot of the market and we often see, I think, a lot more of the market than our competitors do because of that footprint and that vision. And so through that, we've rationalized our capacity. We're very careful in the sense of -- from a productivity standpoint on these assets. And so we're just careful in the sense of what we let in the door and we get to see more of what we can let in the door in that sense and we tend to try to pick the things that we know that we can make with a reasonable margin. So as long as the markets stay at the levels that they are, it gives us the ability to be more selective in that sense. Eric, you know that and...

Eric Elzvik

That's exactly what we are doing.

Mark Troman - BofA Merrill Lynch, Research Division

Okay, great. And just one follow-up. On the cost out program, Joe. I mean, it's, I guess over the years now, building up to be a big number. How long can this keep going, this sort of 3% to 5% of COGS or $1 billion, is there still plenty of headroom or is it all market-driven, how should we think about that?

Joseph M. Hogan

No. It's not all market-driven. I mean, it's a lot of it, as we've talked about before like we did at the Capital Markets Day last year and we will look out 2 or 3 years on these projects, particularly with OpEx, what we have to do in order to drive that kind of productivity. This year, on the sourcing side, we hit indirect cost a lot harder than we did last year and we have more visibility to it. We're getting more following in that sense. And so, again, in this strategic period up to 2015, we have very good visibility to be able to keep driving this and I'd like to just hold that vision out to 2015 and there's nothing that tells us we're going to fall off a cliff after 2015 either, okay? We still think there's a lot of opportunity in the business. And Eric...

Eric Elzvik

And as I recently said in one of the investor meetings, it's about half of it is supply chain and about half of it is operational excellence. And you have to see that operational excellence also include then cost reductions that come from redesign of products, and that's, of course, a continuous activity that's going over time. So we are very confident with this 3% to 5%. In times of big economic upswing, it will be more difficult to push the supply side of it, but on average, that's what we see.

Operator

The next question comes from Daniela Costa from Goldman Sachs.

Daniela Costa - Goldman Sachs Group Inc., Research Division

One of the questions, actually, a follow-up to your comments on raw materials which you commented for Power, but I was wondering, extending and get also to the shorter cycle areas, if some of the movements we have seen, not also on copper, but all in things like silver, which over the past were big headwinds if they actually can -- could be somewhat of tailwinds as we go towards the rest of the year. And the second thing on the Japanese yen topic, and you talked about last quarter that you didn't really -- were not seeing much changes in terms of the Japanese players, but could also use some sub-supplies from Japan, as an advantage. Wondering if anything has changed on that or you if you have taken advantage of more sub-supplies from Japan given where the currency has continued to move.

Eric Elzvik

I can take the question on the raw material and silver as you mentioned. Yes, there has been some downward pressure on those commodities, but also in the Automation business, and in motors and in low voltage products, where we use the silver mostly. We also have chips [ph]. So this will come over time and with balances over time and we are not speculating on any of those. So there will not be any real windfalls out of it, but there will be some tailwind over a period of time, that could be, depending on how the prices are developing. Also the forecast, of course, looking out for the rest of the year and into next year is not conclusive where those commodities will go, given where they could obviously go, mainly in Asia.

Joseph M. Hogan

I think the China recovery is going to have a lot to do with how the commodity cycle goes, I think that's the main driver, as you all know. On your question about the Japanese yen, nothing really has changed, Daniela, from what we saw and we reported on before. I haven't seen our competition acting in a different way, in the sense that their pricing piece -- companies, like Sandvik, from a robotic standpoint, are very disciplined and I don't think you'd see it in them. I watch it more when the Japanese competitors work from a Power Products standpoint, and I haven't seen any indication of that yet. Remember, these dollar-to-yen ratios are not historically -- I mean, it's -- obviously, the yen has been much higher in that sense, but we, from an overall historical standpoint, we've seen these kind of yen levels before, so I think it's just taken some of the pressure off the Japanese exports, but I don't think it's a phase change at all.

Operator

The next question comes from Simon Toennessen from Crédit Suisse.

Simon Toennessen - Crédit Suisse AG, Research Division

Just 2 questions. The first one, on Power Products. I believe your Power Products margins was positively impacted by a good medium voltage performance, particularly in the last months of Q1, which I think, I believe your medium-voltage business is generating above 15% margins. Are you seeing sort of similar trends into the second quarter as well? And the second question is on your order backlog in general. I mean, you're flagging the strong order backlog particularly in Discrete on the robotic side. Can you talk a bit more about all of the Automation businesses? And in case of ongoing short cycle momentum staying weaker for longer, how long do you think your order backlog across the Automation businesses can sort of protect your organic revenue development?

Joseph M. Hogan

On the first part of your question, on the PP medium voltage performance margins, I'm not going to tell if you're right or wrong on our margins, but it's good guess. I'd say that medium voltages are shortest cycle business within the Power Products side, so it's always really tough to call quarter-to-quarter, where it's going to land. I just -- the advice that I would give to the investor community right now is I don't see a significant difference or a change in demand pattern as we go into the second quarter. I don't see a big difference one way or another. When it comes to the order backlog from an automation standpoint, I think Eric has got a lot of experience there, I'll turn it over to him.

Eric Elzvik

Yes. As I said earlier on the call, we have added a chart on the division backlog in the back of the pile to be looked up. But what you can see there is that backlog is quite stable, basically, on the same level as last year, and local currency is actually up by 2% with a bit of variation between the different divisions. But PP is 2%, PS is minus 2%, Discrete is minus 2%. Overall, we have still a positive book-to-bill, so we are not so worried with the inflow for the load. And Discrete Automation [ph] has a backlog of $4.5 billion at the end of the quarter, so it's a substantial part of the business that is in the backlog even on Discreet Automation. So now the quality of this backlog has also been improving in the Power side, which, of course, will help us longer term, not in the next quarters, but longer term, on the quarters.

Operator

Next question comes from Jeffrey Sprague from Vertical Research Partners.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Joe, just a couple of follow-up questions. First, on PS, the margin execution out of the gate, first quarter after the reset, was a little bit better that I was expecting. I just wonder what we should expect there as the year unfolds, is there other stuff in the backlog that maybe presents a little bit of a setback on the journey to improvement, or anything else, just to be aware of this as we think about how that rolls out.

Joseph M. Hogan

Sure. Jeff, on that -- look, we're pleased with that. It's really -- was good project execution, but as you indicate in your question, you have to start with a reasonable margin to be able to execute well in that sense. As we go through the year, what we had promised on the reset is that as we move into the fourth quarter of this year that we'll be in the 9% range. And we're still committed to that. This 8.3% little higher than what we thought, and we're going to encounter some pressure from backlog as we go through the year. And so, I'd tell you, don't expect an increase on this margin or this being a consistent margin as you move into the next few quarters. We do have some pressure in that sense. But again, it's how we execute. It's also how some base orders comes through in this business, too. That are shorter cycle, that can happen, and we can ship. And so -- but it is a good indication of our strategy, Jeff. And while we were confident last year in making the changes that we did and we're still very confident of reaching that 9% by the end of the year.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And just 2 quick follow-ups. On -- just back on the PP pricing, is the down to -- is the down to both the order price and the revenue price, if there's some distinction, if you could flush that out? I'm wondering if you could just share with us what your actual China sales performance was in the quarter, up or down sideways.

Joseph M. Hogan

For Power Products?

Eric Elzvik

Let me take the pricing question first. We have a 2% in the order side in the first quarter. Maybe there will be more than 2%, but somewhere around 2%, count on that. And on the revenue side, it's somewhere between 4% and 5% in the quarter from history.

Joseph M. Hogan

And then Power Products. You're asking, Jeff, for Power Products shipments? Revenues in the...

Jeffrey T. Sprague - Vertical Research Partners, LLC

No, no, I'm just thinking total ABB in China in the quarter. You gave us the order number, can you give us the revenue number?

Joseph M. Hogan

4%.

Operator

The next question comes from Sébastien Gruter from Societe Generale.

Sébastien Gruter - Societe Generale Cross Asset Research

Two questions, if I may. First on the service and the gross margin, it was quite strong in the quarter, up almost 200 bps quarter-on-quarter and year-on-year. Were there specific positive mix impact in that quarter or do you think this is a new sustainable level for the service business? And my second question would be about base orders, down 5% organically in the quarter. Were there any meaningful change between January, February and March for this data?

Joseph M. Hogan

We're going to scramble for a second to grab you what you need here, Sébastien.

Sébastien Gruter - Societe Generale Cross Asset Research

Okay. On the first one?

Joseph M. Hogan

Yes. That's what we're -- I mean, we're aware that...

Eric Elzvik

Yes, so what you say is the gross margin is up, and that's also because of mix and service. We have lower content of full-service, and there's a mix between the divisions, so quite different margin levels also on service, some are extremely good and some are still good. And when that mix comes out, it comes out slightly better with the gross margin in service.

Sébastien Gruter - Societe Generale Cross Asset Research

Joe, do you think this is a sustainable level, such as 9% gross margin for the service as you improve the mix?

Eric Elzvik

We are starting to drive up the margins in service like in all other places, so we hope that, that is close to it. But there will always be a slight difference quarter-by-quarter.

Joseph M. Hogan

Yes. I mean, there's a lot of mix in services. But I mean, when you look systemically, we're going to be pulling more and more full-service out of that portfolio. I can't tell you we're going to maintain the margin that you saw. You're going to some mix around it, but we're trying to beat it, trying to drive it up. On the base orders, your question on the base order piece, I'd say that it was better in March than it was in January and February.

Operator

Your next question comes from James Moore from Redburn Partners.

James Moore - Redburn Partners LLP, Research Division

Joe, Eric, I've got 3 questions. On the PS business, I saw the orders have been weak for the last 3 quarters. I'm just wondering if that's the market or your selectivity, in other words, are you giving up about 1/5 of revenues making that money, is that kind of the way it's working for the reset. And on the net working capital, I see we've moved up to the 16.5% level. And against the 13.5%, is this just seasonality and do you feel you're on track there? When do you think we can think about 13.5%; and on the savings, look, I don't want to be overly mathematical, but unless I'm mistaken, if we take 4%, the midpoint of your 3% to 5% COGS, it's more like $1.1 billion, $1.2 billion than it is $1.0 billion. So should we think about $1.1 billion, $1.2 billion this year or more like $1.0 billion?

Joseph M. Hogan

While Eric is riffling through this thing, I'll give you the PS piece. On PS, it's a little bit of both. Remember, PS can live and die on large orders. And so James, like we missed DolWin 2 that offshore platform and, look, we lost that, we priced ourselves out of it, we knew what we were doing and that was a selectivity thing on our part. We've got enough offshore in that sense. We saw what base orders on PS has actually got better in March than that what we had, again, in January and February. And so that's the best thing to watch. I'd say, this is not a linear kind of an approach. You're going to see this fluctuate up and down, depending on what we're bidding on. I'd say the biggest changes that we're making have to do with substations and how we quote on substations and also in grid systems, in some of the grid systems, and that's where we're making most of these kinds of selective decisions on margin [indiscernible]. And so I think you'll see it, James, begin to kind of equal out and solidify over the next few quarters. On the net working capital, I'm going to give that one completely to Eric, and see what he says.

Eric Elzvik

We were at 13.8% at the end of last year, which was a quite good achievement comparing to the earlier quarter in 2012. The idea has been to be somewhere between 11% and 14%. Given the economic situation, I think it's probably in the upper end of that range at present, and that's where we landed last year. And the 16% we have now is a seasonal situation. It was higher in the first quarter. We are working hard to improve that seasonality, but we will never go away completely. But we feel quite confident that we would be able to bring it down towards the end of the year, in line with what we have done in the earlier years.

Joseph M. Hogan

James, on the savings side, I'd just say, look, we try to drive all we can from an overall standpoint and we've guided you toward $1 billion. Will it be $1.1 billion or $1.2 billion? It's too early in the game to tell you, but I'd say the weaker the economic activity out there, the more chance that we have to push on the SCM side. And so I wouldn't necessarily equate that to upside if it happens because that just means our demand patterns are going to be reflected by that kind of a thing too. So I think if you're trying to plug the spreadsheet right now, I'd stay on $1 billion.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Okay. And just to come back on the PS, just to think of it in a different way, if we look back in a couple of years' time and say how much of the PS revenue did you kind of exit from the resets, could you give us a rough feeling?

Joseph M. Hogan

This $4 billion -- I think when you look at the 2015 plan, we took out $4 billion, but we made it up completely in margin, so you ended up net-net the same on a margin standpoint.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And it's sort of going according to that plan, is kind of what I'm getting at as you see yourself working into it?

Joseph M. Hogan

Yes. I mean, honestly, James, you know it's a guess, right? We took $4 billion out, we took our best bet on what that might mean and so far, it's playing out that way. But we'll just report on it quarter-to-quarter, but I think that's the best we can tell you right now.

Operator

The next question comes from Olivier Esnou from Exane BNP Paribas.

Olivier Esnou - Exane BNP Paribas, Research Division

I have a few questions, please. Coming back to the Power System business, the actual organic sales growth has been quite volatile -- up double-digit, down, up again. So since it's such a backlog business, can you maybe indicate what sort of organic sales growth profile we should put in for the year? The second question is on the LP business. There's a nice margin improvement this quarter. You mentioned cost control and capacity utilization. Actually, there's very little organic growth this quarter. So I was wondering if that is just an extra net price gain or most of the savings accruing to significantly more than usual to that division. How can we better understand the performance bridge here in LP? And maybe lastly, I looked at the organic order growth -- I mean, the actual order growth for service, it's down this quarter. It hasn't been down for quite some time and I know you're exiting that business here as well, but it's not something you started this quarter. So can you give a bit more of a sense of what was driving that down and how we should think about it for the rest of the year?

Joseph M. Hogan

I guess we'll start with orders growth -- we'll just take them backwards, right? On the order growth for services, look, it was down, and some of it was mixed because of full-service being down on year-to-year. We are pleased about it, though, it's roughly 19% or 20% of revenue overall. And from an order standpoint -- now the first quarter usually comes in that way, so it's not a big difference. We don't see a material change in our services business, that's really driving us across-the-board. We have to really take it business-by-business, but full service, as we push that down, you're going to see some of these fluctuations at times, but don't look at that as we don't in any way feel that we have a systemic issue in services and we continue on our strategy to push services to 20% of revenue during this strategic period. On the sales growth, we would go back up to the organic sales growth for PS. When you say organic, when we look overall, if we land a few big jobs this year, we could have a significant increase in Power Systems. Right now, we run it in an idea that we're looking at Power Systems orders about flat for the year. But we'll have to see, that can really swing based on how large orders are between $0.5 billion and $1.5 billion could come in. And now your other question about LP, I think, to be honest, we have really favorable comparisons this year. We had a very difficult quarter in the first quarter of last year. We had some operational issues in Italy, we had the China issue on orders. And so when you look at that margin gain, I feel a lot of it has to do with we had business disruption last year, and this year we have more continuity. I wouldn't look at it as a big change in the sense of how we're operating.

Eric Elzvik

And there is also some positive price impacts in LP.

[indiscernible] numbers, but some positive.

Joseph M. Hogan

That's true, yes.

Olivier Esnou - Exane BNP Paribas, Research Division

Okay. Maybe just a follow-on, on PS. I was more thinking about organic sales growth. So are you saying that even the sales figure for the year is quite dependent on some orders you could take during the year?

Eric Elzvik

You're looking at the revenues rather than orders now?

Olivier Esnou - Exane BNP Paribas, Research Division

I was thinking about the organic sales growth for PS for this year, that was my question. And so I want to make sure if you can guide on that.

Eric Elzvik

You could see in the first quarter, we have a 15% sales growth increase.

Olivier Esnou - Exane BNP Paribas, Research Division

But the previous quarter was down 4% for organic growth, so it's been quite volatile.

Eric Elzvik

[indiscernible] Timing of the backlog, but I think based on the backlog, we should expect to have an increase in PS during this year in sales, but you have to see then that quite a bit of that has to do with the old order backlog with very low margin orders that are going through also.

Olivier Esnou - Exane BNP Paribas, Research Division

Right. I mean, it wasn't visible in Q1, the low margin backlog, but...

Eric Elzvik

That's correct. But it's -- part of it was there, but it's different [ph] time during the year, that's coming a bit lumpy between the quarters. So it was...

Olivier Esnou - Exane BNP Paribas, Research Division

Okay, so a small increase, yes, okay?

Joseph M. Hogan

I think, Olivier, the way you look at that, too, is just remember, we're holding to -- we'll be at 9% in this business from a margin standpoint in the fourth quarter. And we're working our way for this reset. There's still some backlog stuff we have to really get through.

Operator

The next question comes from William Mackie from Berenberg Bank.

William Mackie - Berenberg Bank, Research Division

Three questions, please. Firstly, quite big order declines in 3 of your key markets in Europe, in Germany, Italy and Switzerland there. And so could you throw a bit more light on how that fell between the divisions and what the implications may be for the business outlook in the second or third quarters? And then on Power Products, if I could come back to that, I recall, during the quarter that you had cautioned that the margins could fall weaker in the business and then it seems that they're pretty much stable with the fourth quarter result. So what was it that surprised you in there? Was it just this medium voltage that you commented on earlier or was there something else that moved in your favor? And then lastly, I know it's not one of your big areas, but I think it's been profitable, but in the Middle East, you seem to imply that excluding South Africa, the Middle East was down. A number of other competitors have reported very strong market conditions in the Middle East for a number of your end segments. So has that something to do with your decision-making centrally or within the region, or is there a mixed effect that implied that the rest of the Middle East was down on an order perspective?

Joseph M. Hogan

Starting with the Middle East. I'd say, we live and die in the Middle East on large orders, Will. So I wouldn't take the first quarter as any indication as the Middle East being up or down, it's just the way our orders cycle in that sense and it's been broadly a big power market for us, and that's why. And so yes, I talked about substations and sometimes, we land [ph] those substations, sometimes we don't, and that would be the biggest swing on that end. On the PP side, I'd say primarily, the difference is medium voltage, so we have limited visibility sometimes. It's our shorter cycle business and it was stronger than it was before. I think, Eric, that's from what I've seen it, it's primary driver.

Eric Elzvik

That's the primary driver. There's some other mix issues, too, but that's the primary driver.

Joseph M. Hogan

On -- your question on Europe is a good one. I mean, obviously, we saw some big weakness in Italy and Switzerland and also Germany. How that washes out by product line, Eric's got some data.

Eric Elzvik

Yes, just to give you some flavor without going in deep detail in some of the countries that have to do with fairly low power orders against high comparables, but I think we can say in, overall, that it is a lot of headwind in those large markets today.

William Mackie - Berenberg Bank, Research Division

Could you elaborate a little bit more? I think in the release, you commented about the motors and drives business for DAM, seeing particular weakness. I mean, is that something which has shifted in the last few weeks, or how do you feel about that going into the next quarter?

Eric Elzvik

In general, they are in a stable trend, overall. But again, there, it depends, in their case also on larger -- on their perspective, larger orders, which is not hundreds of millions, but larger orders from their perspective. And sometimes, they fall in Italy, sometimes, they fall in France, sometimes, they fall in Germany. So that's why I try to summarize it also, but yes, there is, for instance, in some European countries, lower demand than a year ago. But there also was high comparables in some of those countries, there for instance, in Germany in the first quarter of last year.

Joseph M. Hogan

Although I wouldn't draw a line through this one. I think we're just going to have to live from quarter-to-quarter here for a while, and see what happens in Northern Europe.

Eric Elzvik

And you have seen the list of countries there with pluses and minuses. We had a similar list the quarter before and you have fairly big swings in the percentages there too, but they were different countries. So I think the message is we have been able to keep Europe flat also as a whole, but also for Automation, respectively, Power on total. But there are quite big swings between the countries, and that's also the nature of the business. I think you'll also see that we have some numbers in the eastern part of Europe, which helps us with our wider footprint that we have now in Europe.

Joseph M. Hogan

One more question.

Operator

The last question for today comes from James Stettler from Canaccord Genuity.

James Stettler - Canaccord Genuity, Research Division

Automation is now 60% of total revenue. Where would you ideally like to see the breakdown between Automation and Power over the next 5 years? That's question number one. Secondly, can you talk a bit about pricing trends outside of Power, in particular for example, in the area of motors? And then finally, are you seeing any change in terms of conditions, in terms of customer advances in large projects?

Joseph M. Hogan

First of all, from an Automation standpoint. Look, what we've done in Automation versus Power, this hasn't been a conscious diversification to try to move the Power side down. The acquisitions have been a lot easier for us in Automation because that's a more fragmented industry and it's broader. And then frankly, we have less anti-trust issues there too, so it was easy. The Power market has declined a little bit, too, so that hasn't helped. But ideally, seeing this thing fluctuate in the 55% to 45% range, you're going to see ranges of 10% or so go over time, and these are some of the more long-cycle, mid-cycle, shorter-cycle businesses. But I think 60-40 is kind of on extremes of what we would want to see and what I would expect to see, overall, in the portfolio. On the pricing for motors, I'm not aware of any increased intensity on motor pricing in any geography. Eric are you?

Eric Elzvik

I think in general, the pricing in Automation, let's make it more general than motors, specifically, has been stable over the quarter. There is some areas with slight declines and some areas of improvement, but overall, quite stable.

Joseph M. Hogan

And your last question, James?

James Stettler - Canaccord Genuity, Research Division

Customer pre-payments, any changes there?

Joseph M. Hogan

I haven't seen a big change between this year and the first quarter of last year.

Eric Elzvik

There's no big change in the pattern there, we are still getting advances.

Joseph M. Hogan

Okay, that concludes our call. Again, thanks. Thanks again for your interest. Again, we're pleased with the operational performance of the quarter and also strategically, where we stand. As we've mentioned, we faced an uncertain economy, I think you can see it with our other competitors, too. But again, I want to express Eric and my's confidence that the teams are up for this and we're ready to push hard to perform well in this current situation. So again, thanks for your interest and we'll be back to you at the end of the second quarter.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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ABB Ltd (ABB): Q1 EPS of $0.29 misses by $0.04. Revenue of $9.71B (+9% Y/Y) beats by $0.08B. Shares +2.7% premarket. (PR)