ABB Ltd (ADR) (ABB) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: ABB LTD. (ABB)

ABB Ltd (ADR) (NYSE:ABB)

Q2 2013 Earnings Call

July 25, 2013 9:00 am ET

Executives

Joseph M. Hogan - Chief Executive Officer

Eric Elzvik - Chief Financial Officer and Executive Vice President

Ulrich Spiesshofer - Head of Discrete Automation & Motion Division

Analysts

Jeffrey T. Sprague - Vertical Research Partners, LLC

Olivier Esnou - Exane BNP Paribas, Research Division

Ben Uglow - Morgan Stanley, Research Division

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

Daniela Costa - Goldman Sachs Group Inc., Research Division

Fredric Stahl - UBS Investment Bank, Research Division

Sébastien Gruter - Societe Generale Cross Asset Research

William Mackie - Berenberg, Research Division

Simon Toennessen - Crédit Suisse AG, Research Division

Martin Wilkie - Deutsche Bank AG, Research Division

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2013 Results Conference Call. I'm Stephanie, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my 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

Good afternoon, both Eric and Joe here. Thanks for joining us on our call for the 2013 second quarter results. As always, my comments in this call refer to the presentation on our website at abb.com.

Chart 2 is our Safe Harbor text covering any forward-looking statements we may make at ABB. I know you're familiar with that.

So we'll move to Chart 3, which is titled, Improved results on a balanced portfolio. We continue to see positive impact on our results from a balanced and geographic business portfolio. We grew orders in a number of key sectors and geographies, including China. And we saw an encouraging trend with sequential order growth in almost all of our product businesses compared to the first quarter of the year. At the same time, we executed from our strong order backlog to drive both revenues and higher earnings. And we continued to take out cost to maintain profitability despite an uncertain market. Orders were down as our strategic realignment in Power Systems launched at the end of last year started to take shape, with our focus on greater project selectivity and higher profitability. But we're pleased to see the first positive result in terms of higher gross margins in the division's order backlog. There have been delays in the award of large orders in the -- which is linked to the ongoing global macroeconomic uncertainty. And that impacted orders this quarter. Our underlying demand drivers remain sound. And we still generated a solid book-to-bill ratio for the first half of the year of 0.99 and 1.06, excluding the Power Systems division. I'll come back to that point later. In addition, we saw a good contribution from Thomas & Betts. And these synergies are on track. Both power divisions achieved a solid operational EBITDA margin. We grew services -- or revenues faster than total organic revenue. And our improving Net Promoter Score shows that we're making progress to increase customer satisfaction. The Power-One acquisition has received all required approvals, and we expect to announce the closing very shortly. Finally, we saw a good increase in earnings per share partly due to some non-cash items. And most of the divisions have turned in a solid cash performance that was basically offset by the cash developments in Power Systems. Eric will provide more details on that piece in a few moments.

Moving to Chart 4. I've highlighted the main developments. I'll also point out, too, that orders are down mainly due to the PS reset, which has been exacerbated by the continuing delays in the award of larger projects. We said at the end of the last year that the repositioning of the Power Systems division would have an impact on orders received in 2013. And weak utility and industrial CapEx is also nothing new. So you're seeing that in our Q2 numbers. The order backlog remains near record levels. A single large order in PS would be enough to move that up to a new record. And we see a positive underlying business environment. So this is really a matter of timing more than anything. High revenues show how our backlogs supports growth through turbulent times. Operational EBITDA margin is more or less flat, and Eric will take you through the bridge in a moment to see how that comes together. But we're pleased that especially both power divisions produced strong profitability in a challenging marketplace.

Let's look at the geographic picture on Chart 5. We felt the timing of large projects across-the-board, but we also saw a number of positives in the quarter. In Europe, Germany, Sweden and France were all high, of course, which helped to offset most of the continued demand weakness in Southern Europe. In the U.S., Thomas & Betts obviously gives us a big plus as we start to capture the large opportunities in North America low voltage space. On an organic basis, the U.S. is lower as we had fewer large orders in the power and oil and gas segments compared to the second quarter last year. The Middle East and Africa is a similar story. Large orders were down here as well, although we did have some good growth in some of our larger markets in the region, such as Egypt and Saudi Arabia. Finally, Asia was lower despite another quarter of growth in China. India remains a tough environment for everyone. We had some large marine orders in Korea last year that just didn't repeat.

Moving to Chart 6, some order highlights you saw in the quarter. Although customers are taking a more cautious overall approach to CapEx, they do continue to invest in improved productivity and efficiency, and utilities are spending on a selective basis to increase how much power they can send through existing grids to improve overall grid reliability. You can find the details of these orders on our website.

Moving on to Chart 7. It highlights the interesting project we're working on together with Fastned to roll out a network of fast charging stations for electric vehicles in the Netherlands. These are DC chargers, direct current chargers, able to charge a car in 15 to 20 -- 30 minutes. In addition to delivering the chargers and some of the IT needed to help utilities handle billing, for example, we're also providing a service program to ensure optimal uptime and the reliability of the system.

Let's move to Chart 8 and an overview of the divisional growth performance. I've already talked about orders for most divisions. When it comes to revenues, you can again see how our longer backlog businesses, like power divisions or Process Automation, can generate growth even in turbulent times. Low Voltage Products is reaping the benefits of the Thomas & Betts acquisition. But even on an organic like-for-like basis, orders are steady versus a year ago but are trending higher sequentially, which is encouraging, since this is our shortest cycle business. Revenues in DM are flat in the quarter, which basically reflects a relatively low orders growth in that business in the past few quarters, which in turn is a result of lower industrial production during that period. Key orders were also down. But again, this is largely the result of the timing of large orders. We had several project awards last year in marine, in oil and gas and mining which didn't repeat. Industrial CapEx is obviously a driver in the business. And we, too, will feel the effects from time to time. Nevertheless, we think we're in the right markets when it comes to automation and upstream oil and gas, in marine applications related to oil and gas and in mining OpEx.

On the earnings side in Chapter (sic) [Chart] 9, the highlights are the 2 power divisions in LP. Our products again received -- achieved a solid operational EBITDA margin as they continue to drive out cost and work their way through a less favorable backlog from a pricing point of view. Power Systems improved project execution to lift their margin by almost 2 percentage points in the quarter. I should point out that this is not yet a reflection of the repositioning efforts and the margin enhancement. That will come next year and beyond as we execute the better margin orders we're taking today that are buried in our backlog. Low Voltage Products also increased margins in the quarter as they executed well across a number of areas, such as cost savings, targeted growth initiatives and improved sales services. DM's margin is down versus the same quarter a year ago mainly because of the mix of revenues flowing through their P&L. For example, our recent successes in the automotive sector and our robotic solution is dilutive to division's margin. At the same time, the power business is on track, continuing to develop positively even though the United States market promoters is soft at the moment. Finally, PA margins are also low. And we're feeling the impact of some under-absorption in business like turbo chargers and measurement products, a reflection of weaker demand in those markets. We have discussed in previous quarters some measures to address that. The PA's quarterly margins are also related to the timing of revenues from different projects, which have different profitability. So to some extent, this is a mix issue. So we'd expect this to be in more normalized range on a 12-month basis.

And now I'll turn you over to Eric, who'll walk you through the EBITDA bridge on Chart 10.

Eric Elzvik

Thanks, Joe. For short term, we have the EBITDA bridge. You can see on the -- starting on the left side that the net savings are again positive. We still have remaining price pressure of more modest and still mainly relates to the power divisions. In PP specifically, the price pressure in the quarter on orders was about 2%, whereas we still have 4% to 5% on revenue, which is reflected in the number above, which is also the same level as Q1. Over the coming quarters, you will then see a reduction down towards the 2% when the orders turn into revenues. We also have a positive volume effect, helped this quarter by reduction in selling and R&D spend compared to a year ago. We are -- about a year ago much more careful with both selling expense and R&D expense. The mix was negative as we had a larger satellite systems revenues flowing through the P&L compared to the second quarter last year. Then in the others, it is a mix of project cost and gains, some foreign exchange impacts, other provisions and costs, for instance, for legal costs, some inventory adjustments, smaller write-downs, which is part of all the running business. And then finally to the right, you see the contribution from Thomas & Betts, which is for the 6 weeks -- sorry, the difference between the 6 weeks last year and the full quarter that they have here in 2013, bringing us to a total margin of 15.2%.

Turning to the next chart, on the EPS. This is showing what we have done in earlier quarters, the details of these items that we have between the operational earnings and the net income. And you can see in the chart here that net income and earnings per share were up 16% on the basic basis in the quarter and 2% if you look at the more operational measure on operational net income in the same way as we have done in earlier quarters. We have also added the year-to-date view as those items between the 2 lines even itself out normally between the quarters. And you can see here that we have grown the basic net income and EPS by 6% and the operational EPS by some 8%.

Turning to the next chart, where we have the Thomas & Betts. You can see that we are still on track in a good way with Thomas & Betts. We had some modest growth in revenues versus a year ago. We calculated it on a full quarter basis. We see some positive signals in the U.S. construction sector, which is certainly supported for T&B. And we remain confident that the growth trajectory will continue for the rest of this year and keep us on plan. Integration is well on track and will remain a key management focus over the next coming quarters.

On Chart 13, you see the cash and the balance sheet situation. Most of the divisions turned in a very solid cash generation in the quarter, which is largely offset by low cash in the Power Systems -- of cash generation in the Power Systems division. This was mainly related to the cash impact on the repositioning that we started in the fourth quarter of last year and which we have commented on earlier. And they will come more through the rest of the year of 2013. In addition, the timing of large project-related payments is always a factor in the project business in PS and can vary significantly from one quarter to the other. On the balance sheet side, we have now net debt of $3.4 billion at the end of the quarter after paying the dividends. And we will also shortly then pay another $1 billion for the Power-One deal. And net of the cash in Power-One, we still have some $750 million to the net cash of the group. We also recently got our A rating conferred by Moody's in the yearly review. So we are in a reasonable shape when it comes to the balance sheet and the right thing.

Then I'll turn it back to you again.

Joseph M. Hogan

Thanks, Eric. Moving to Chart 14. This is a chart, where we'll try to give you an idea, not necessarily quarter-to-quarter but as you look out in the years or so, what we see from the underlying performance or opportunities we see by regions around the world. We've updated it this quarter to reflect how we're feeling. Basically, there's not much difference to what we really presented in the first quarter. There's uncertainty out there. Macro trends are highly unpredictable and all the disclaimers that we always make. But I think in this case, each one of these regions is, you all know on the phone, has its own dynamics from an economic standpoint right now. The short term is very tough to call. We see some positive sequential trends in many of our product businesses, which gives us reasons for cautious optimism. And that's basically we're saying. It's when you look at our short cycle, the shorter cycle businesses we have, you're really seeing some positive trends here over the last quarter that we haven't seen in the last few. On the other hand, uncertainty around the timing of large orders is likely to persist as we saw here in the second quarter. We see that there are some large projects in the United States that are now likely to be pushed out to next year. Brazil has been weaker than expected, and that shouldn't be a surprise given the economic difficulties that, that country has been seeing right now. At the same time, the construction business in the United States has provided us with some opportunities to grow in the local and power distribution. In Europe, also, no change. We continue to benefit from our balanced local presence so that we can offset weaknesses in some countries with strength in others. Germany continues to look relatively stable, which is helping us ride through the weakness in Southern Europe. The Middle East is a large project business. You know that over the years, you kind of live and die by quarter on these large orders. We have to wait and see how that develops. And in Asia, we see positive signs out of China, while India remains a challenge. So in aggregate, I'd say things are moving sideways. But I wouldn't expect demand to go down from here.

Moving to Chart 15, just a summary of what we're talking about. Our outlook for the rest of the year remains unchanged for the end of the -- from the end of the first quarter. Macro indicators are increasingly mixed, which makes predicting the timing of orders more difficult, especially large project quarters. However, our strong backlog will continue to partly mitigate that uncertainty while we continue to focus on balancing cost and growth and increasing customer satisfaction. We remain confident that our business and regional balance will continue to provide us with profitable growth opportunities going forward.

And so with that, I'd like to -- Ulrich Spiesshofer is on the phone and if you can join us. And I'd just like to say, look, I am thrilled that Ulrich has been selected by the board unanimously to backfill on me as I've announced my exit. Look, Ulrich and I have been good teammates for the last 5 years. We share a love and passion for this business and a confidence in its future. And I love the continuity that Ulrich can provide as he comes into the role. And so with that, Ulrich, I'll turn it over to you for a few comments.

Ulrich Spiesshofer

Thank you very much, Joe. So thank you for your kind words. I think, Joe, you'll leave a house with very positive momentum in many dimensions and especially a wonderful team that I have the privilege now to be part of for 8 years. So to the audience of this call, Joe and I are working very well on a smooth transition. And I'm really pleased to share with you that the whole team is supporting the transition in an absolutely wonderful way. I personally look forward to connecting even closer to all of you, especially the ones that I've not yet met personally. So with that said, I hand over to Joe and Eric again.

Joseph M. Hogan

Thanks, Ulrich. Ulrich has also agreed to answer any tough order questions instead of me. Come up here. So we'll turn it over to him. That's a joke. Ulrich is signing off. Look, we'll -- Eric and I'd be happy to answer any questions that you now might have.

Question-and-Answer Session

Operator

[Operator Instructions] First question from Jeff Sprague from Vertical Research Partners.

Jeffrey T. Sprague - Vertical Research Partners, LLC

I guess 2 questions. First, just on backlog, can you give us a sense of how much of your backlog is deliverable in H2?

Joseph M. Hogan

In the second half of this year, Jeff?

Jeffrey T. Sprague - Vertical Research Partners, LLC

Yes. How much of your current backlog is deliverable in the second half of this year?

Joseph M. Hogan

So Eric, what do you think?

Eric Elzvik

It's out of my price range, Jeff.

Joseph M. Hogan

We're going to move on or...

Eric Elzvik

Yes, I mean, I'll take care of that one. Obviously, we have a backlog of -- in excess of $28 billion, which is 2/3 of the yearly volume for ABB. So you can take for granted that for the second half of the year. A significant part is in the backlog, obviously. In addition to that, we have the short cycle business which should provide us with more orders to add for the rest of the year. But we will not quote a specific percentage.

Jeffrey T. Sprague - Vertical Research Partners, LLC

But there -- is there any difference from where we'd typically be at this time in the year?

Eric Elzvik

No. It is very similar to what is a typical year.

Joseph M. Hogan

Jeff, what are you worried about? Just the revenues in the second half? Is that the basis of your question?

Jeffrey T. Sprague - Vertical Research Partners, LLC

Yes -- no, I'm just trying to get a sense. Obviously, some of your backlog could stretch out very far. And so I'm just -- you're expressing confidence in your year around kind of backlog and just lumpiness in the orders. I'm just trying to get a sense -- really, your line of sight on the top line.

Joseph M. Hogan

We feel confident on revenues in the sense of where we are.

Eric Elzvik

We feel confident for the second half of the year. In many of the businesses, our lead times in a way that the revenue projection now for the next 6 months is fairly clear.

Jeffrey T. Sprague - Vertical Research Partners, LLC

And then just one more and I'll move on. Just on U.S. grid pushouts, I think the sentiment at EPG was maybe that stuff is holding and it's not necessarily slipping. It sounds like things have changed. Obviously, I'm quite aware of the pressures in the U.S. power market. But is there something in particular that you're seeing happen with regulated returns or any other dynamics that are really getting at the delays or pushouts?

Joseph M. Hogan

Jeff, the -- I wouldn't say there's any underlying systematic changes from a regulatory standpoint or thought process. We're tracking a few large jobs in the United States. And it looks like they could just slip from a fourth quarter kind of a play to next year sometime. And so it's just -- to me, it's the urgency of these things, Jeff. It's not a regulatory piece. And we're talking about quarters here, not years.

Operator

Next question from Mr. Olivier Esnou, Exane.

Olivier Esnou - Exane BNP Paribas, Research Division

Few questions, please. First, on the process business, you talked about -- so pressure in marine, mining, oil and gas. I think marine and mining, I wasn't so surprised. I was a bit more surprised by oil and gas. I'd like to know if you could just maybe give some relative quantification of the kind of decline you're seeing in those 3 markets at the moment. The second question is on the bridge, where there was a reversal of R&D and SG&A. And I just wanted to know, is it something which you already had in the budget at the end of last year? Or is it your reaction to the current slowdown? And what sort of flexibility do you have around those numbers for the year -- for this year, sorry. And the third question is on Power Systems performance, which surprised me again this quarter. I think the message has been generally that Q1 would be weak and there would be a gradual recovery towards the 9%. Then Q1 was strong, and the message was, "Yes, but it's going to go down again." So what's driving this surprising performance? Is there -- is the visibility into this business actually quite difficult quarter-over-quarter?

Joseph M. Hogan

Olivier, first of all, on the process piece, on Process Automation, remember, this is a mid-cycle to long cycle kind of business. I think it's good to keep in mind, too, that 50% of the revenues of that business are related to services. So they're pretty consistent in the sense of quarter-to-quarter predictability. And then we have this huge volatility that flows through in larger project orders that often between $50 million and $150 million. They're kind of the range that we work with there. We have really -- when we talked about marine being strong last year, almost all that marine is associated with oil and gas. And so we really struggle sometimes, expressing that as marine rather than oil and gas. And many of that went through ships that would be going offshore to drill for oil and gas. And some of that was captured in Korean shipyards. And when we talk about Asia being down quarter-to-quarter, a big part of that Asia piece is Korea and not being able to repeat those orders. From a mining standpoint, it shouldn't be -- to me, it shouldn't be a mystery that we see some pressure from mining. But mainly, we talk about if it's really the excavation side of mining and we might call greenfield or bigger expansions in mining. When you look at order processing and things that have to do with productivity or just the efficiency that you want to drive in ore body inside of a mine, we still feel pretty good about our tender backlog in that area, things like drills, mill drives and mine hoist and those kind of things that appeal to that part of the mining industry. So again, the mining is down. But again, we see it and we, I think, understand it. On the oil and gas piece, I would really say that has nothing to do with the industry itself. The CapEx is pretty consistent in that industry. That is strictly what we see in large orders, often upstream that occur quarter-to-quarter. On the bridge walk and R&D, I'll let Eric answer that question.

Eric Elzvik

Yes. So on the sales and the R&D side, it is down on the straight quarter-to-quarter comparison and mainly due to timing of some cost on the R&D side. Overall, we are not reducing R&D costs -- cost-saving efforts. We are rather keeping R&D costs stable from 2012 and 2013 on an overall basis. On the sales cost, we are not expanding as assets get planned in the budget. So there, we have more leeway of what we can do. So this -- we are somewhat below the budget on that side, on DM, but not much.

Olivier Esnou - Exane BNP Paribas, Research Division

And for the full year then, should we expect still a net investment? Or do you think you can have some 0, positive contribution?

Eric Elzvik

I think on the R&D side, we are, as I said, aiming to keep somewhere around last year's number. And on the sales side -- sales cost is not only expensive. It's also related to volume to some extent. So I think you should expect the sales as percent of revenues you have seen so far to continue during the year.

Joseph M. Hogan

We'd like to keep those percentages to orders and sales in line. But if you look at R&D too, we had some Power Products and things that would be, what we call, commissioning expenses for new technology last year. They can be -- that's why Eric talks about quarter-to-quarter. He want to keep them flat. It's not that we're reducing the amount of R&D that we're spending. It's just the kind of R&D that we do within the business. And now on the PS performance, look, they performed well this quarter. They're close to 8% at 7.9% operational EBITDA number. Look, if this is quarter-to-quarter project execution and this team has done really well in the first and second quarter, I know that a lot in the team, as they talk to you guys out there, are cautious about this at times than we need to be as we flow through these projects because there's a lot of variability. Some of these projects are going up. Some are going down. And we often don't get great clarity on this until the last month of the quarter and how it's going to wash out. But what I'm really pleased with, though, is we talked about the increase in margin and our order backlog for PS. Now orders are down 31%. No one likes to see that. But we did predict that the orders would be down. But we're seeing a significant margin increase in our backlog, which is good. And that, for certain, will start to bleed in next year. And that will help to underline these margins and not have to live on the kind of month-to-month and quarter-to-quarter variability that we had in the past of just living hand to mouth on EPC and systems orders. And that's one of the key reasons we did this.

Operator

The next question is from Ben Uglow from Morgan Stanley.

Ben Uglow - Morgan Stanley, Research Division

I have a couple. First though, I just wanted to make sure I completely understood the response to the last question. On the oil and gas side, both modules, it seems to me what you’re saying, Joe, is that you're not seeing -- or the year-over-year comps are difficult. You may not have seen so many large orders, but there is not a fundamental change in your customer behavior. Or did I misinterpret that? Or have your oil and gas customers changed their CapEx intentions to any significant degree? So that was question #1. Question #2 is really just a color on China. The orders were indeed positive. And could you tell us how power and automation in China roughly split out? And I'm very curious on what your general impression is on the industrial environment in China at the moment, Joe.

Joseph M. Hogan

Okay. Ben, on the -- on your first question, oil and gas, I'd be very clear. I don't see a customer changing CapEx on oil and gas. What we see is the oil and gas that we expressed through marine, we haven't seen as many offshore ships actually being contracted this year than we did last year. So that's the change there. I don't think that means that the CapEx is going down. You just move your CapEx into different areas because that's the way the shipbuilding piece goes. Did that make sense to you, Ben? So in a classic oil and gas business, when we're talking about onstream, offshore platforms, we're playing a lot in those types of things. I'm telling you, we're not seeing any, what I would say, systemic change in that business. The year-to-year -- these huge Marine orders that are associated with oil and gas, we've seen this kind of fluctuation. And that's more than anything is what I've seen in numbers. Ben, I want to be sure you're clear on that. Is that clear enough?

Ben Uglow - Morgan Stanley, Research Division

Yes. Well, I guess I was curious about was just whether, let's call it, upstream oil and gas CapEx, onshore, whether big customers, particularly in the States, were deferring or changing their intentions in any way.

Joseph M. Hogan

I haven't seen that. I can't say it won't happen, but I haven't seen that yet, okay. On the China side, when you look at China for the first quarter, it's -- pardon me, I'm sorry, for the second quarter, we can give you the first half, too, which is about 11, right, overall?

Eric Elzvik

Yes.

Joseph M. Hogan

For the second quarter, power is about flat overall in China and automation was about 3. So the 2 percentage points that we talked about for the quarter, predominantly, the growth side was on the automation piece. On the power side, Ben, we gave you some color. Some of the upside we've seen has been in transportation, things like transformers that are used on electric trains. Medium voltage switchgear that's used on the stationary part of electric trains was positive. If you go back then maybe 1.5 years ago, we're talking about how those orders dried up because of the uncertainty around the transportation secretary, the leadership that was going on in China, whatever. We see that gradually improving. We also had some nuclear orders that are moving through also, from a power standpoint, that was a positive -- from a year-to-year standpoint also on the power piece. So we think that China will continue to be in a growth phase for us. We're not predicting double digits here in any short period of time, but this is relatively robust in the sense of the breadth of what we're seeing in China right now for the first half from a growth standpoint. On the automation side, if you drill in low voltage, low voltage is up pretty well within China, too. Some of that has to do with the construction market in China particularly as we -- as it moves west. And some of it has to do with the industrial side.

Operator

The next question is from Mr. Andreas Willi, JPMorgan.

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

My questions are on the power business. So you've been more selective. Some of your competitors have also said they will be more selective. So it's more difficult for us now to track the market because orders were also down recently. At ALSTOM, they're falling; at Siemens. What do you see overall in terms of the market growth in that business? And who is taking the orders that you and maybe some of the western competitors don't want to take anymore because they're too price competitive? And the second question on pricing in power, what do you see there now in new orders coming in if one looks at the PPI index in the U.S.? And I don't know what the grid that's really reliable data that shows that transmission and transformer pricing has kind of started to weaken a bit recently. Is that index as fair reflection or not?

Joseph M. Hogan

Andreas, on the Power business, on the order side, it's so really in the game to figure out exactly who's losing share or who's giving up share. But if you take our Power Systems division, there's 2 business units that are buried in there that are the primary drivers of the lower order intake for the quarter and there are grid systems business that does things like cables and high-voltage DC and those kinds of businesses. And it's our Substation Automation business who will do substations. And remember a big part of the substation market continues to be in the Middle East. I could tell you specifically in substations, and when we did the power systems reset, I wanted to be sure we weren't competing against Korean EPCs or just basic EPCs before. We're used to competing against Siemens in those kinds of applications, competing against Alstom but I never felt that I want to be in competition with Korean EPCs. I could tell you specifically that we have lost some of the business in Power Systems in the Middle East to Korean EPCs. But I also can tell you that power products has actually grown in product sales to Korean EPCs as we've done that. And so, I feel comfortable that that's the right decision for us in the sense that we've mitigated risk that we've experienced in those projects before and then the higher profitability side of our business on the products side is we're helping to pick some of that up through the Korean EPCs.

On the larger grid side, Andreas, this -- remember, this plays out in broad time. These are big orders, often $300 million to $1 billion orders. They don't come around every quarter. And so I think we're going to have to -- we'll have to wait to see how that really works out between, really, Siemens, Alstom and ABB as we quote those kind of orders going forward. And that's still is not clear and when we talk about pushouts, that's where we've seen most of the pushouts in the Power Systems business that's been around in grid systems business.

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

And on pricing?

Joseph M. Hogan

I'll let Eric get that.

Eric Elzvik

Yes. So the pricing on the orders in our product is about 2%. So it's the same level as first quarter 2013. So you can say we are down on the lower level of deterioration, much lower than before, but it is stable from the first quarter. Could be that, that partly -- so it will also reflect when you talk about the index there even though the U.S. is of course not the whole world. We have the whole world in our calculations. And as I mentioned already in my presentation on revenues, we still see a 4% to 5% price deterioration. So as they work through the backlog now over the coming quarters, that 4% to 5% will come down towards to 2%.

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

And should then just assume margins go up by 200 to 300 basis points? Or are there any other drivers we should consider?

Eric Elzvik

There's a lot of other drivers including the mix on the geographical side and obviously, how much cost savings we can achieve, but the assumption that price coming down should help us on the margin side is clear.

Operator

Next question from Ms. Daniela Costa, Goldman Sachs.

Daniela Costa - Goldman Sachs Group Inc., Research Division

One question, well, 2 questions related to your comment on basically, what's happening on large orders, really it was the lack of large orders and the fact that you don't expect them to come back so soon. So 2 things. One, is there -- will you see -- if this goes on for a prolonged period or what are the implications for capacity? So do you think there's a chance you have to really look at that? And the second one is, how should we see this in the context of your target system? I remember from prior period you used to have this yellow, green, red lights. Could you maybe update us a little bit on what are the implications of these for those targets? Thank you.

Joseph M. Hogan

Yes. On the large orders -- look, I want to tell you, although I'm not saying they're not coming back anytime soon. I hope I didn't say that. I hope what you're hearing is I don't know and no one knows. We see those large orders out there. They're in our tender backlog, they move around a lot, but I'm not making a prediction that they're moving out for any uncertain period of time. I don't want to -- I won't be here, but I don't want some of it to come back in the third quarter and we surprise you with some large orders, and we just don't know. There's volatility there. And on your capacity question, when you look at ABB, particularly when we talk about large orders around, like Power Systems and Power Products, a lot of our capacity is assembled capacity. It's -- these are not -- there's a lot of temporary labor associated with this in the way be put it together. We have a good backlog in those businesses, we can project what's going on, but we have an ability to be able to adjust from a labor content standpoint, a material standpoint, with the visibility we have to the backlog, which makes those businesses a little bit easier to deal with from a capacity standpoint and the shorter cycle stuff like we have in Low Voltage Products. There are 2 businesses that I would say are loading-based and they're buried within the Power Systems business. It's our cable business which has a lot of installed capacity and, obviously, amortization cost. And also our high-powered electronics plant for thyristors and IGBTs and those kinds of things here in Switzerland. Plant loading are important for those. But right now, as we look at plant loadings for those things, we're comfortable for those as you go out 1 year or 18 months. We're really in good shape on those assets. On the capacity -- on the other piece of it, Eric will talk to you about the red, yellow and green.

Eric Elzvik

So the long-term outlook on revenue growth was -- the target is 7% to 11% of Power Systems. The revised policy issued in December last year. We are well within the range. If we look at the accumulated number including the performance so far this year. We showed the green light on that target in this recent presentation on whether the light is green or turning to a little bit of yellow. It's hard to say. It will depend on, as Joe said when those large orders will be awarded and how they will play into '14 and '15. But we feel confident about the target and such. Did I answer your question, Daniela?

Daniela Costa - Goldman Sachs Group Inc., Research Division

Yes. I was wondering on the other divisions as well beyond Power Systems.

Eric Elzvik

All of the divisions, I thought you're focusing on Power Systems. I think not too much have changed fundamentally on the other divisions from what we showed you earlier this year in terms of these targets. We said all along that reaching those targets will include -- that we have a reasonable growth in '14 and '15 and that is what is still seeing. Obviously, depending a bit on all of those products that were once again discussed earlier on the call.

Operator

Next question from Mr. Fredric Stahl from UBS.

Fredric Stahl - UBS Investment Bank, Research Division

Could I ask you, it sounds in between all of these order chapters, still sounds that you're seeing some green shoots across your businesses. Assuming that this green shoots materialize and we do get a better second half, is it still fair to assume that your mix gets better as the cycle picks up. That's question #1. And then I have to go back on the large orders. I mean, if I look at your large orders, the print you had in this quarter is the second lowest since Lehman Brothers. Is there any chance that the market has changed enough for this to be -- or some -- a level around of orders that's the new normal? Is there anything out there that points in that direction?

Joseph M. Hogan

Fredric, on the green shoots piece and your mixed piece, it's not a secret here that if -- when the market comes back, our short-cycle businesses tend to be more profitable than our longer and mid-cycle businesses. So if you see a big increase in low-voltage drives and low voltage products in those areas, they tend to be our most sensitive short cycle businesses, that is a positive mix indicator. Okay? And the margin in those businesses are better than before. So a cycle pickup in that piece would indicate that we would have some margin advantages and I hope that's what you're asking. On the large order piece on them -- look, I think if you're thinking, is there a market collapse going on or is there access volatility that we're seeing out there? If you look at our comments with -- Eric and me and Ulrich, we're really trying to express through those comments, is that we're not predicting any dire economic changes out there. We see orders, we see customers wanting to move at times. It's just slower than what we'd like to see at this point. But overall, when you look at internally some of the leading indicators that we look at, as Eric mentioned, our short cycle index that we use as a key indicator here actually turned up this quarter for the first time in several quarters. And that's a good sign for us. There's some PMIs out there that we track and I'm sure you track, too, that have moved into a positive sense from an overall regional country standpoint. And those are good signs, too. But there's bad signs out there also, in the sense of some CapEx spends and utility delays and those kind of things. So probably, we just see different signals and we're cautious but there's nothing in us that says that were we're really pessimistic about the future or repeating something that we saw in the first quarter or the second quarter of '09.

Operator

Next question from Mr. Sébastien Gruter from Societe Generale.

Sébastien Gruter - Societe Generale Cross Asset Research

First question would be on base orders; they were down 5% in Q2. Same decline as in Q1. And I thought you said during the last quarter, in Q1, that base order has improved through the first quarter. And therefore, I wonder if you have not seen a deterioration through Q2? Or were there a meaningful difference for you on your change in base orders as you went through the second quarter? Second question would be on Power Systems. I mean, there is quite a disconnection between cash flow and your P&L performance for this business over the last few quarters. When should we expect this gap to narrow? Is it H2 or are we talking 2014 or '15? And final question, would be about the -- if you could you give us some color about the gross margin performance on your Q2 orders given there was half large orders, were there any meaningful impact on the gross margin compared to the one you have in the P&L at the moment?

Joseph M. Hogan

On the base orders question, is -- your base orders were down 5% in the quarter overall for all 5 divisions, I think. Our definition of base orders are anything under $15 million and I'd say I would be more alarmed with that number if it wasn't for our short-cycle index actually heading up that we've seen. And so I look at that as more situational than I think it is a leading indicator that we're seeing significant drop in activity. On the cash flow piece, Eric's going to pick that up.

Eric Elzvik

Yes. We clearly see an improvement in the capital in the coming 2 quarters getting to our year end number which is the typical seasonal pattern. Some of it will come in Q3, a lot of it will come also in Q4. The low number for the first half year mainly has to do with power reset, as I said before, power systems reset but also timing of project payments. And some of those timing of project payments will also turnaround in the second half of this year. So you'll -- you should see already in Q3 some improvement on that number.

Joseph M. Hogan

If I interpreted your margin question, and I'll try to answer it from -- if I don't answer it properly, just tell me. We talk about power systems specifically and in power systems, we've seen our margin -- and our orders that we're taking is actually going up. As Eric said before in his presentation, that means that at some point in time, when those orders start to feed in, which will be next year, hopefully, begins to, that will be positive for the company. Again, that's why we're doing it, that's why we've made the decisions we've made to -- we've said is restructure and rewire Power Systems business. And the margins have to go up based on what we've committed to the street and to our shareholders as we change up business.

Sébastien Gruter - Societe Generale Cross Asset Research

If I can rephrase, I mean, on the -- for Power System, the current order there were $1.3 billion, would you be making the same absolute approach in your EBITDA?

Joseph M. Hogan

$1.3 billion haven't been in calculation.

Eric Elzvik

That -- again, I think on the Power Systems, you should not isolate them in 1 quarter. You should look at the overall accumulated number and long term, we have said with the 2 new targets on growth and margin, lower growth and higher margin target until 2015, that should balance itself out and produce the same absolute profit in 2015.

Operator

Next question is from Mr. William Mackie from Berenberg Bank.

William Mackie - Berenberg, Research Division

Joe, you transformed the business since you've been there, right? You've added of 1/3 to revenues and changed the geographic balance of the business. I guess, an interesting question for me would be as you head off to new pastures, what do you feel you've left undone that sits there in front of you as leave the company? And then perhaps, more specifically, with regards to Power Systems, if I come back to the detail, some very sharp falls accompanied by the reset in terms of orders, not impacting revenues yet, but where should we think with regard to a 2-year view about the reliable ongoing stream of revenues within the Power Systems business on a normalized basis following the reset and the change in the demand landscape?

Joseph M. Hogan

Well, first, of all I'd tell you, I think -- we've made a lot of changes around here in 5 years, but I would never just say that I've made these changes. I've had a great team around me. There's a lot of work that we did collectively to push this company in the direction. I feel it's more market-oriented than it was before. I think it's more customer-oriented. We definitely have balanced the regional geography with the acquisition in the United States. Splitting up automation products. If you go back years ago into Low Voltage Products in DM really exposed some real growth opportunities, and frankly, portfolio deficiencies that we haven't leveraged in the business and a lot of our acquisitions went to help to mitigate that. I'd say -- if you say what's left undone, well there's always -- I mean, God, things are never the way you want them. I think, first and foremost, initially, I have a lot of confidence in Uli and why I was really happy to make the decision he did is we need to execute on these acquisitions, it's just not done. Each one of these has their own areas of continued integration and synergy opportunity that we haven't completely realized. And then we have Power-One that will now announce the closure up here shortly, which is a good bet for us because it's a lot of work behind that piece that we're going to have to move from. Secondly, Will, is services, we've put a lot of money in services up-and-down and we're seeing the fruits of that, but we still have a long way to go. And we need to hit that target between 20% and 25% of revenue, that's if it's in reach and the team's committed to that. We continue to see good momentum in that piece. It's really important that we follow through on that because in times like this, when we're seeing volatility in orders and a lot of the concerns you guys are going to have for future EPS is the more that we can make sure that we can mitigate these kind of cycles with -- just in services business. That's going to help us overall. We are also -- when we did the Ventyx acquisition, it's a software component which is inside the ABB that I think is a really important strategic future for the business, and we're really in good shape in the sense of realizing that. It's just we're going to have to continue to be aggressive in that area. And when I talk -- when I say aggressive, I don't mean acquisitions. I mean aggressive in the sense of how we challenge our organization to really work around software and use software as a solution. On the PS reset, well, I go back to what Eric just said. I mean, when we did that, our goal was, we think that there's -- when you look at the entitlement, I would say margin within that business is more than a systems business, because it is. There are product groups like high-voltage DC, like cables that are buried inside that business that need a higher return, and so just treating into the systems business with 7% return isn't the right way to do it. Secondly, none of us were happy with the volatility of earnings and obviously, that went around off the EPC contract. And mainly it was the C, as in EPC, that was hurting us. And that's not necessarily a kind of business that you want to be in unless it has a proper pull through. And so when we made that decision, as we said we're basically going to sacrifice a certain amount of sales and we were going to not lose margin in the sense of the overall margin dollars, and obviously, that over top of a lower sales base, would have given you a higher amount of percentage profitability. So don't -- we have $1.3 billion of orders in the quarter for Power Systems. Don't take this and annualize it. That's not what we expect here. The sum of this is just the push-ups that we're talking about. But in the context of our strategy, making the context that will reduce the volume and will reduce a significant amount of volatility in earnings and we'll increase the overall range percent. That's the goal, Will, and I see it especially with the margin increase in the backlog. I see that actually beginning to work and I'm really pleased with the better project execution that we've seen in the first 2 quarters of this year versus last year. Eric, can you kindly comment on that -- these 2? Because you know this one.

Eric Elzvik

No. I think I alluded to it already went when I talked about the targets and the traffic lights before. We have a 7% to 11% growth target there. And profitably, this is more important than growth. As it looks today, they are inside that range on the target basis. And obviously, we need to see some growth in '14 and '15 in revenues to get into that 7% lower end of the range in 2015.

William Mackie - Berenberg, Research Division

A tiny follow-up relating specifically to the Discrete Automation and Motion. I notice that the orders have been falling in the Americas for the past 2 quarters and it's beginning to show up in the revenue line at least on a reported basis. I mean, is that all South America or is there some trend picking up in North America as well?

Joseph M. Hogan

Will, we, there's a lot of different businesses there. You have motors, you have robotics and different -- Brazil, South America has not been strong for us and that's been a big part of what we see. And United States, we've had some issues particularly around some segments in the marketplace, industrial segments that haven't been strong quarter-to-quarter. Again, I don't see this as something that is indicative of a significant deterioration and certainly, isn't any share loss. It's just the U.S. economy have been going sideways. Eric, you -- coming from that business too, you probably have a different...

Eric Elzvik

I think it's -- and also, Canada on top of it. So part of it has to do with some larger orders in the context of the prototypes we have in DM. But Joe is right. It's also the flattish development in the overall market there. But it's not an area of large concern.

Joseph M. Hogan

Will, you know what, what I'll tell you, too, is don't -- I know there's some concern about DM out there. I don't bet against that business, okay? They came in with 18.1% operation EBITDA for the quarter. That portfolio is a good portfolio. It has good balance across the globe including China, Europe, United States. I'm very bullish on that business. It has some of our best businesses from a margin opportunity standpoint that are buried inside that business. I think that is a business that's in a strong position and it's been well run obviously, and I think it has a good future, in short-term and long-term.

Operator

The next question is from Mr. Simon Toennessen from Crédit Suisse.

Simon Toennessen - Crédit Suisse AG, Research Division

My first question is on the Power Products division. I remember in Q1 you talked about positive mix effects from Medium Voltage and I wondered how this looked in the second quarter and what's your sort of -- what were you seeing for the third? The second question is on mining. I mean, you talked about the issues potentially in more greenfield-related, excavation-related. And maybe to give us a bit of better idea, if you could allude to what the split between greenfield and brownfield roughly is, and just to have a better idea of how that should develop. And is it fair to assume that the service side in mining is above group average? And the last question is on the industrial motors and drives, which was again more negative in the second quarter, what's your outlook for that and maybe in that sense, maybe touch on the performance of Baldor in the second quarter? Thanks.

Joseph M. Hogan

The mix effect of PP, Eric, you want to?

Eric Elzvik

I think they have a growth contribution from better mix in the first quarter. As you can see, the margin was approximately on the same level for PP in the second quarter so they have noted any additional help from mix but it remains basically the same as we had it as before. Obviously, there's also then the mix on the geographical basis which also plays in a little bit. But we're first to see that it's a balance situation between Q1 and Q2.

Joseph M. Hogan

On the greenfield mining versus greenfield versus brownfield, I've never tracked the business that way. I think it's kind of obvious right now that the mining companies, given the changes of the CEOs that are going on out there and then the real strong focus on productivity, that they're looking to optimize the assets that they have rather than the expenses and that's obviously feeding through into the kinds of CapEx that they're following through within and that's how we're pursuing these pieces. In industrial motors and drives, it's a mix. Baldor's performing well. Margins are still strong. They're still doing extremely well in the marketplace. It's helping our -- drives business there as we have talked about when we did that acquisition. But there have been some segments in the marketplace such as coal mining and things where you would sell significant number of industrial motors that have been hit because of that industry being down, we are very much aware of that. But we see other areas like gas and different areas where it's actually picked up. So it's just more of the balance there right now than we see from the overall trending for growth. Those businesses have good a good international footprint all around world both drives and motors. And overall, they've been relatively flat when you think about it. Eric, you came from there. I think you know more from what you're seeing by region.

Eric Elzvik

I think that's right. Part of what we said in the very short cycle business which is trending upwards has, of course, to do with some of those businesses and that is partly in Asia, partly in the sequential basis also in the Americas. Baldor is doing well, even if it has some headwinds in certain parts of the markets in the U.S. at the moment.

Operator

The last question for today is from Mr. Martin Wilkie, Deutsche Bank.

Martin Wilkie - Deutsche Bank AG, Research Division

Just to come back home onto Power System, to some of the large orders. I think you made a comment on the media call early this morning that roughly 50% to 60% of the order decline was cyclical and the rest of it was your own selectivity. But I just wanted to clarify if that was for Power Systems particularly or just large orders more generally? And then related to that, in Power Systems, are you stepping away from more contracts than you have perhaps expected and once you've actually started going through this motion of turning away some contracts, has the level of what you're turning away been roughly what you anticipated? Or it's perhaps a little bit different?

Joseph M. Hogan

My comment on Power Systems, large order this morning, I said 50% to 60% of that. If you think about it, 50% of it is basically our decision, 50% of it is cyclical. I think it's the best way to think about it overall. And that was just for PS. We weren't making that comment for any other business. Predictably PA in that sense. On the turning away part, as I mentioned in the other question, is what we are walking away with versus Korean EPC is in the Middle East. We anticipated that. There's no surprise in that sense. In the grid systems side, I can say there's only 1 large order that we've walked away from that we didn't pick up and that was understood why didn't what to that but there's not another large order in grid systems right now that I can point to say we've walked from. We've done several quotes that reflect the new margins and risks contingencies that we need in those kinds of businesses and we even refuse quotes on some, but they haven't been left -- yet to know what the result of that -- those particularly decisions can be. So again, not to be maybe too granular to you but on the substation piece, very predictable. On the grid side, it's too early to tell. We're going to have to wait and see.

And with that, I just want to thank you for your interest. Again, from an execution standpoint, we felt good about the quarter. I would -- as you make your decisions out there about ABB, I would say don't take the orders piece and necessarily linearize it or annualize it. I don't think that's what's going to happen but we'll have to wait and see how the market develops going forward but regardless of what that piece is, we feel good about our future, our ability to execute, to continue on our cost-out modes and to leverage what we think is a more balanced portfolio both from an automation power standpoint and a geographical standpoint, too. And I want to thank you, too, for the relationships I've had with you over the years and we are really confident in Uli and the leadership team that will be left here. So, thank you, and have a rest of good day.

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!