ABB's (ABB) CEO Ulrich Spiesshofer on Q2 2016 Results - Earnings Call Transcript

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Q2 2016 Results Conference Call

July 21, 2016 08:00 AM ET


Alanna Abrahamson - Investor Relations

Ulrich Spiesshofer - President and Chief Executive Officer

Eric Elzvik - Chief Financial Officer


Jeff Sprague - Vertical Research Partners

Martin Wilkie - Citigroup

Mark Troman - BofA Merrill Lynch

James Stettler - Barclays

Andreas Willi - J. P. Morgan

Ben Uglow - Morgan Stanley

William Mackie - Kepler Cheuvreux

James Moore - Redburn

Andre Kukhnin - Credit Suisse

Guillermo Peigneux - UBS



Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2016 Results Conference Call. I'm Maria, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. [Operator Instructions]

At this time, it's my pleasure to hand over to Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead, madam.

Alanna Abrahamson

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us for ABB's second quarter 2016 results call. With me today are ABB's President and CEO, Ulrich Spiesshofer; and ABB's Chief Financial Officer, Eric Elzvik. They will give a review of the Q2 results and an update on the execution of our Next Level strategy. The press release and analyst presentation was published at 7:00 AM this morning and can be found on our website. This call is being webcast via our IR website, as well as being recorded.

Before we begin, I would like to draw your attention to the important notices on slide 2 of our ABB presentation regarding Safe Harbor and our use of non-GAAP measures. This conference call may include forward-looking statements. These statements are based on the Company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.

With that, I would now like to hand over to Uli.

Ulrich Spiesshofer

Thank you, Alanna. Good afternoon ladies and gentlemen and welcome to our conference call. Let me start with the highlights of the quarter on Slide 3. We continued our solid progress on profitability, delivering double-digit operational earnings per share growth for the quarter and year-to-date, even with revenues declining 2%.

Operational EBITDA margin improved 100 basis points to 12.7%, but operational EBITDA absolute increased by 5%. We delivered margin increase for the 7th consecutive quarter. All divisions were within their target margin corridors, demonstrating that our white collar productivity program as well as our other cost and productivity measures are delivering significant results. Base orders remained steady. Total orders were 5% lower, reflecting the timing of large order awards and longer deal cycles. Our cash performance was again very strong. Cash flow from operating activities was up approximately 80% to more than $1 billion.

Now let's consider our performance in the context of our three focus areas; profitable growth, relentless execution and business-led collaboration on the next slide number 4. As mentioned, base orders were steady in the quarter amid the system market headwinds. The global picture masked regional differences, and as you'll see on the next slide, it shows that our PIE formula for profitable growth is working. By consistently driving penetration, innovation, and expansion in target markets, we are able to stem the impact of strong market headwinds.

We see this reflected in our NPS results, which yet again improved, which underscores our progress in making ABB a more market and customer-focused company. In line with our plans, the strategic portfolio review of Power Grids is progressing well and ABB will report on it at our Capital Markets Day in October 2016.

On relentless execution, we continue to drive profitability with all of our divisions within their target margin corridors by the end of the second quarter. The double-digit growth in operational earnings per share shows our execution programs are truly working. White collar productivity delivered structural cost savings in all divisions and is now hitting the bottom line. A strong working capital management was one of the main reasons for the strong cash performance in the quarter. Finally, we strengthened our leadership team, appointing Sami Atiya, a highly talented and experienced leader with a strong industry and software background as Head of our Discrete Automation & Motion Division effective June 13th.

Turning to the regional picture on Slide 5. Europe was strong with base orders rising 7% and total orders up 2% in the quarter. Demand was driven mainly by construction and integration of renewable energy and energy-efficient solutions for sustainable transport. Base order demand was strong in Germany, Spain, Sweden and Denmark, but weak in the UK, amid uncertainties around Brexit.

The Americas were weaker due to lower investments in process industries, however consumer industries held up. Total orders declined 5%, with base orders basically stable. Brazil was a bright spot for base orders, which improved 24% on focused growth initiatives. U.S. Board base order demand showed some sequential improvement. However large orders were very low.

Demand in Asia, Middle East and Africa was mixed. Total orders were down 10% and base orders 6%. China was strong as ABB won orders of more than $300 million to deliver equipment for 1,100 kilowatt ultra-high voltage direct power link. China overall, grew double-digit with steady base orders. India grew 15% and was strong in all end markets excluding the process industries. However, these positives could not offset the major decline in Saudi Arabia, where the demand was significantly impacted by the current uncertainties related to the oil and gas and infrastructure environment. Our base order performance overall demonstrates that our PIE approach is helping us to deliver in the face of significant market headwinds and dampen the impact of those headwinds on ABB. With that I'll hand over to Eric.

Eric Elzvik

Thank you, Uli. On slide 6, you can see the divisional performance. Let me take you through some of the highlights. To start in Electrification Products, operational EBITDA margin improved approximately 80 basis points on additional cost savings and also some positive mix. Capacity adjustments to address the shift in demand were implemented swiftly during the quarter. In Discrete Automation and Motion, steady third party base order development could not be fully offset by the impact of the lower large orders. The implementation of the focused capacity adjustments and the productivity measures resulted in improved margins for the second consecutive quarter and the division re-entered the margin target corridor. For the full year we're aiming to be within the target margin corridor, but it will remain challenging as we are still adjusting capacity. Process Automation continued to face significant market headwinds, as reduced capital expenditure and cautious discretionary spending in process industries impacted large and base orders. Operational EBITA margin was basically stable, as slowly initiated cost and productivity savings largely offset lower volumes and reduced capacity utilization. In Power Grids, third party base orders grew 7% and compensated for the lower large orders. The operational EBITDA margin of 9% was significantly higher on improved volumes, productivity and cost savings. The ongoing step change and the white collar productivity programs are delivering results. This result includes additional project cost for the remediation of actions taken with regard to the cable components.

Let us move to our operational EBITDA bridge on slide number 7. In this challenging market we achieved approximately $143 million in net savings, which is comprised of our ongoing cost saving program, price pressure and our white collar productivity measures. As you can see, these savings are the main contributor to the bottom line improvements. The positive mix in electrification products as well as the higher service revenues helped operational EBITDA, as well these improvements more than offset any negative impact from lower volume levels and product margins. As always, the other category consists of numerous smaller items, like sudden inflation, changes in corporate provisions, realized foreign exchange gains and losses, certain commodity supply chain costs, as well as other smaller one-offs. And as in the year-earlier quarter, the ForEx translation had some negative impact, but less than in the prior quarters. All of these changes delivered a Group operational EBITA margin, operational EBITA of approximately $1.106 billion and an operational EBITA margin of 12.7%, which is a full percentage point improvement. For 2016, we guided that the majority of the WCP restructuring costs would occur in Q2 and they are on track. We have booked $270 million of WCP restructuring and $57 million of WCP implementation costs in Q2.

Let's now turn to slide number 8, the capital management slide. We continued to improve our cash generation in the second quarter with cash flow from operating activities up by approximately 80% to a $1.082 billion. The main contributor to this was our working capital improvement measures, as well as timing of tax payments. We also implemented a continuous value chain improvement system in key operating units worldwide. As you saw in Q1, and now in Q2, our focus to have a more balanced cash generation throughout the year is working. Please remember, for the second half of 2016 that we'll have further cash-out payments for the WCP restructuring.

Regarding our share buyback, in the second quarter we purchased shares with a buyback value of approximately $780 million, and since the program was announced in September 2014, we have now purchased around 170 million shares with an approximate value of $3.5 billon. The buyback is a further demonstration of our commitment to drive sustainable value creation for our shareholders. Let me now hand back to Uli.

Ulrich Spiesshofer

Thank you, Eric. Before we move on to our strategy implementation, I would like to make one additional comment on ABB's capital allocation priorities. They remain unchanged. As you saw during the quarter, we remain disciplined when it comes to M&A even to rumored M&A in the robotic space.

With that let's move on to slide number 9. Stage 2 of our Next Level strategy, launched in September 2015, aims to accelerate ABB's transformation by moving our businesses closer to our markets and driving growth, as well as becoming leaner and more agile in developing our organization. On Slide 10, you can see some examples how we are driving organic growth through our framework of PIE; Penetration, Innovation, and Expansion. We delivered higher orders in all of the BRIC countries, as well as stronger base orders in three of them, while China was stabilized on a steady level. Our penetration efforts to sell more of our existing offerings to accessible customers were rewarded.

Our innovations continue to strengthen our competitiveness and drive demand for our solutions in the quarter. Especially, as one example in robotics, the ABB has the largest installed base of more than 300,000 installed robots today worldwide. We launched a suite of IoTSP services called Connected Services to improve robot uptime and optimize systems performance, as well as SafeMove2, the latest generation of certified robots monitoring software. Connected Services is an excellent example of how ABB is helping its customers realize the opportunities offered by the emerging Internet of Things, Services and People, known as IoTSP in a digitalized industry. And as a true highlight of this quarter, our YuMi robot won the most prestigious Global Industry Innovation Award in robotics. Through our expansion efforts, we gained access to the Japanese market for high voltage direct current, winning our first orders through our recently announced joint venture with Hitachi. The success paves the way for a new de-risked HVDC business model for the Power Grids division.

Turning to Slide 11, our 1000 day white collar productivity program is delivering structural savings in all divisions. After 566 days, we are well on track. Having realigned our divisional structure and taking out layers of management, we streamlined our Group headquarters by more than 20% and consolidated it into one functional location from four previously. In addition, our two new global shared services centers are operational; in Bangalore, India and Krakow in Poland, marking a very important step forward in the global consolidation of functions like finance and HR. Consequently, we are well on track to achieve the 2016 targeted white collar productivity savings of 400 million.

Let's turn into Slide 12 and look at progress on our 1,000 day working capital program which Eric is leading, through which we aim to drive best-in-class capital performance throughout the value chain in inventory and unbilled receivables. Working capital has decreased approximately 1.1 billion since the end of June 2015, and as a percentage of revenues is 150 basis points lower. We are on track to meet its target of freeing up at least 2 billion in cash by the end of 2017.

Turning to Slide 13, a key ambition of our collaboration focus is to drive more productive and efficient collaboration across our divisions, as well with our customers and partners. In the second quarter, our Electrification Products and DM, Discrete Automation and Motion divisions worked closely together and won an order for energy efficient electrification and uptime improvement of a new Greenfield car factory in Mexico belonging to Renault, Nissan and Daimler. This solution reduces energy consumption by greater than 20% and increases productivity representing true value creation for our customer Renault, Nissan and Daimler.

As I already mentioned, we strengthened our leadership team with the appointment of Sami Atiya to the Executive Committee as President of the Discrete Automation and Motion division, effective June 13. Sami is a great colleague already and a highly talented experienced leader with a strong background in product, software and services in Europe, the Middle East and the U.S., and he will play a key role in driving our offerings in DM for the Internet of Things, Services and People in a digitalized industry.

Now let me summarize the quarter on Slide 14. We delivered continued solid progress on profitability. Our execution programs are working. White collar productivity is hitting the bottom line and cash flow has truly moved to the next level. Base orders are steady, due to PIE, but market headwinds persist.

Moving to the outlook, in this environment of heightened uncertainty, we expect the market headwinds to continue. We will remain focused on executing our Next Level strategy, driving our growth initiatives and our productivity and working capital programs relentlessly. We will host our Capital Markets Day on October 4 here in Zurich, when we will report on the further progress of our Next Level strategy, including the strategic review of our Power Grids division.

On Slide 15, let me close by reminding you what we really stand for. ABB is a pioneering technology leader with strong positions in attractive markets. We have a crystal-clear transformation agenda to drive earnings per share and cash return on invested capital, which we are implementing with rigor, discipline and perseverance. We remain committed to delivering attractive returns to all of our shareholders. As demonstrated again in the second quarter, our Next Level strategy is delivering positive results and we will continue to accelerate sustainable value creation.

With that I'd like to conclude my remarks. And thank you all for your attention.

Alanna Abrahamson

Let's open up the line now for questions. I would like to remind everyone that maximum two questions so that we would allow more people to be able to ask questions to Uli and Eric. So with that may I hand it over to the operator?

Question-and-Answer Session


We will now begin the question-and-answer session [Operator Instructions] Our first question come from Jeff Sprague, Vertical Research Partners. Please go ahead.

Jeff Sprague

Just thinking about margins, the margin execution is quite solid, given the lack of demand support that you're getting, lack of help you're getting from the end markets. Could you help us think about when revenues do improve, your confidence level and kind of the incremental margins on revenue growth, is there spending that may have to work its way back into the equation, whether it's growth-related spending or support spending or anything like that? Could you please give us some perspective -- just draw a perspective on that please?

Ulrich Spiesshofer

When we look at the margin situation at the moment, I think the team did a really good job altogether, because if you take the revenue that we have delivered this quarter it's an interesting situation, because we have some of our most profitable segments contracting massively and we have some growing segments that might not have the same margin dampening that contraction and despite that negative effect, the team has delivered some margin accretion, which is substantial 100 basis points in the quarter. So if you look going forward, first, overall, if revenue comes back and the growth comes back, you can expect a drop-down effect on the margin over time. As you have seen, we have been very, very disciplined on our spending on all discretionary elements. The white collar productivity program is driving productivity, for example, in sales, and you mentioned sales. Specifically, we have made significant progress in that field already and we will make more progress in the future to drive productivity, so additional growth will not be eaten up and will not require huge amounts of spending to realize it. So there should be a -- is an expectation. It will be actually best if our most profitable markets come back in a significant way, because then the negative mix effect that we have had to compensate so far this year, which would then be reverted and help us with a margin acceleration.

So, look what we do for this year. The market headwinds are continuing, we are right into a heavy weather sailing in many of our businesses. We have been very disciplined on the cost and the cash side year to date. We are navigating ABB exactly that way. In some areas we are investing quite significantly. If you take robotics, if you take food and beverage, if you take India, we are definitely investing to realize the growth opportunities out there, and in some other areas we are driving massive cost reduction and restructuring in line with the segments. Our PIE approach and our heat maps give us a much more granular understanding of the different segments. So I think, I would say, overall, we fly on side, but the side is much sharper focused than in the past.

Jeff Sprague

And then just a quick follow-up on growth, obviously, you have a very different mix than, say, Halliburton but, Halliburton yesterday, Dover today, all trying to call the bottom here on energy-related CapEx. What is your view on that? Do you see signs of bottoming? How do you see that playing out in your portfolio over the balance of the year?

Ulrich Spiesshofer

Look, given current volatilities and the uncertainty of the market, I'm very careful calling any improvements in any market at the moment. Altogether, we see on the oil and gas side the first signals that customers might be thinking about some CapEx investments in the future again. It's too early to call it a tender activity. It's too early to call it a swing in the market. So, yes, there are some signals, but I would be cautious calling that, it's too early a change in the direction in the market.


Our next question comes from Martin Wilkie from Citi. Please go ahead.

Martin Wilkie

The first question was really on the cost savings and the white collar productivity. When we look at your bridge, it looks like your cost savings were quite a bit ahead of the run rate that we might expect for the full year. But I just wanted to understand, was the price versus cost element a lot better, was it white collar productivity delivering sooner than you expected, or just if you can give us a bit more color as to what we should expect for that plan, and if you could just give us the details for the white collar productivity savings, specifically, that will be very helpful as well for me.

Ulrich Spiesshofer

Look, I'll make a couple of remarks on white collar and then hand over to Eric on the bridge. The white collar program is really a success. We are taking out massively cost, we're becoming more HR-faster in many, many areas and we have taken some very, very decisive actions. It's very important that you're not only looking into large cost chunks, but we also look at the signaling effect of certain changes. So, for example, here in the headquarter in Zurich, we have consolidated four buildings into one. Headquarter staff is down by more than 20%. And that's a strong signal to everybody around the world that we're sweeping the steps, not only outside that we're also sweeping that here in the headquarter. If you take the three dimensions that we are working on, on the management complexity as you know, we have taken out whole lines of management that we had previously. I have today four divisions and three regions, when I started we had five divisions a head of global market, and eight regions. So I needed 14 people to run the world and today I need seven and that's something that has been now multiplied across all the divisions and regions in a really positive way. The second piece is around the business functions. And if you take for example, the rollout of, we have it rolled out now to more than 80 countries. At the moment it's more a cost than a benefit, because you are still in the ramp-up process here, but we see in the countries that are further advanced in implementation, we see significant productivity improvements. So this is one that will really fully hit us a little bit later in the future. Then look at the superb services. At the moment we have basically started double staffing, because we're staffing up Bangalore in India and Krakow and Poland, and at the same time we still have the resources in the existing functions. So when they are fully executed when this move is fully done, you can expect an additional impact. So, overall white collar is progressing very well. Your catch is good. We are really on track, we might be even a little bit ahead on track. But in this market conditions trust me, we are really firing on all cylinders to get good momentum going.

With that I'll hand over to Eric to put that into context of the overall EBIT bridge.

Eric Elzvik

Thank you, Uli. Yes, so Martin, in this $143 million plus are the price effects. There's additional cost saving program of 3% to 5% of cost of sales, as well as the WCP savings. And it's clear that the reason that we are way ahead on the positive side on the map is clearly a big contribution from the WCP savings. The other savings are also coming well along, but it's a big contribution from the WCP saving in this quarter.

Martin Wilkie

The second question was really on the corporate cost and really for the second quarter, you've come in probably below the run rate that you might infer for your annual guidance. Just to get some sort of sense, does that mean that we can expect Corporate costs for the full year to be lower than you previously talked about, or is there sort of a different weighting this year that we might expect to come back in the second half? Thank you.

Eric Elzvik

Yes, I'll take that one Martin. The second quarter was a low quarter, a good quarter obviously. Some of the cost savings from white collar also goes to the Corporate side. We've earlier talked about 400 million, 450 million of corporate costs on operational EBITDA level and I would say, as we see it today, we will rather be around 400 maybe even somewhat below 400.


Next question comes from Mark Troman, Bank of America Merrill Lynch.

Mark Troman

To start, two questions on demand pace. Firstly, this quarter was characterized by lower large orders. I wonder if you could comment on the pipeline and visibility you have on that, both say on the power side and I guess on the energy side, on the longer cycle side. And the second question, following on from, I think, Jeff's oil and gas question, are you seeing any difference between upstream and downstream trends, especially in the light of the Saudi weakness -- base order weakness and what's going on there? And also mining, you seem to be seeing signs of bottoming. What about the mining, is that in the same situation? Thank you.

Ulrich Spiesshofer

Look, let me run you through the large order situation that we have at the moment. It's really massive structural differences between the different businesses. In the second quarter, you have seen that basically in Power Grids and in Process Automation, base orders, relative to large orders were better and we have had a quarter that was very low overall on the large orders. Now on Power Grids, the tender pipeline is healthy. The market out there is active. Connecting renewables over long distances into the power grid is a very attractive value proposition that ABB has. And I would say on that one, it's a temporary effect in the quarter, more than it is a structural effect longer term.

On the Process Automation side, there is a massive contraction on large orders compared to the previous year. Remember last year we had, for example, still quite a bit of marine large order in there for oil and gas supply vessels, and that market basically has dried out this year. So there is a structural element that will be there for quite a while on the Process Automation side, especially related to the oil and gas activities and we have to say that's as it is.

Going forward, in terms of bottoming out, I would be very, very cautious calling that too early, but we see a different pattern on upstream and downstream. On upstream, it remains a contracted spending pattern. Even on the OpEx side there is very, very timid and cautious spending. On the downstream side, we see some signals for some tenders coming in and there is some activity out there for larger projects that might come in the pipeline. Would I call it overall a changing market yet? I would be very cautious doing so. Now the things that still sell in that business is energy efficiency and productivity, up-time improvement, to make sure that on a relative base against your competitors, even with low revenue per barrel you have effective cost advantage in this business.

You asked about Saudi, yes look, Saudi was a particularly weak quarter in the second quarter. What's going on in terms of the changes, on a government level you have seen what's happening on the oil and gas side that is something that we're watching very, very carefully. Our presence in Saudi is strong, we got a good team down there, but there is definitely a very weak market activity in that part of the world at the moment.

Last, you asked about the mining piece. Mining is -- remain soft, whether the turn of the software is there already or not, I think in the view of current market uncertainties, volatilities and the most recent events that destabilized the world even further, I would be very cautious calling that market turn already.


Next question comes from James Stettler from Barclays. Please go ahead.

James Stettler

Thank you, and good afternoon all. On Power Grids the margin was 9% that included some charges on DolWin2. Could you talk about how we should think about the margin going forward, as you exit -- as you complete the exit from all those legacy contracts, will there be an additional benefit on that? And then secondly on Discrete Automation and Motion, with the change in management there, will there be any strategic changes in the division? Thank you.

Ulrich Spiesshofer

On Power Grids, I think Claudio and his team are doing a wonderful job improving the profitability, the business model, the underlying quality and especially also the risk profile of this division, you have seen a significant margin at Grids again in this quarter. And yes you are right that includes some charges or some costs that we had on the cable connectors for the 320 kV cable system that leads into DolWin. And that is something when you have technology installations that can happen. We rather catch it in the testing phase and fix it.

So what we're doing is, we are fixing that situation and take the cost. The stability of the margin and improvement of the margin shows the underlying quality improvement of Power Grids and absolutely should you see, over next quarters and years, a further margin improvement. That's not only in terms of having a different quality tender backlog, it's also the business model. As you have seen, we announced this quarter the first orders in our Japanese joint venture. That's a completely different business model from a risk profile than we had before on HVDC, partnering with Hitachi.

So I think that the hard work of Claudio is starting to pay off in his team and we see the results and hopefully over the time in the future there is more to come. On DM, Sami is an incredibly gifted leader with a strong background in artificial intelligence and robotics. In fact, we are so proud about our two-arm YuMi robot. He did a PhD study on a six-arm robot, so let's see what impact he will have on that business altogether. But I think he brings a strong background on solutions, on service and on software. So I wouldn't expect a fundamental radical shift, but I would expect a very strong shift in line with our overall aspiration to shift the center of gravity of ABB.

We will continue to push harder on digital-based solutions. We will drive software differentiation, we will drive service even more and altogether, I'm highly optimistic that Sami, together with his well-proved leadership team will get DM back on an even better momentum. The division has, despite a leadership change this quarter now, achieved the lower end of the target margin corridor. This is nothing to be too proud about, but it's good to be back in. If you look at the sequential improvement the last couple of quarters, we're definitely in that business out of the trough and we're working very, very hard to deliver further improvements.


Next question comes from Andreas Willi, JPMorgan. Please go ahead.

Andreas Willi

My first question is on the second-half organic sales outlook. I think you got asked in the press call this morning about it, whether there's still an expectation of a return to positive organic growth in the second half, but then you said something it's like too uncertain, maybe you could just clarify that message. And the second on the strong profitability in Process Automation, given the topline, maybe you could give us some indication on how mix helps there and how profitability within service and within equipment is developing, so we better understand kind of the underlying trends there. Thank you very much.

Ulrich Spiesshofer

If you take the market that we're facing at the moment and the events of the last couple of days and weeks, so in Europe we had the last couple of weeks multiple times, a crisis team that we had to set up within minutes if you take Turkey, if you take France, very, very sad developments that we really regret very deeply. In such a world where you have in addition Brexit, you have in the U.S. the elections coming, which typically slows down then certain investment appetite, I would be very cautious to give any predictions for the second half of the year in detail. One thing is very clear, it is our ambition to bring ABB back to growth. And actually we're working very, very hard to realize that ambition as fast as possible. Whether it's in the second half of the year or later, it's too early to call given the current uncertainties and the volatility that we face.

Now if I move over to PA, I think that Peter is a leader that has a very good grip on the future outlook on his backlog and the understanding of his cost base. When he saw certain parts of his business portfolio turning negative on the orders, he swiftly acted on the cost base. And the good news is in PA, many, many of the activities in PA have quite some lead time. So, if you are a responsible leader and you have good visibility on that, you can adjust your cost base in a significant way. Peter is probably of all the divisions, the one who is furthest advanced in implementing white collar across his management structures. He has taken massive cost out in a very rigorous and disciplined way and at the same time making the division even more market-focused. So that part is going extremely well. The service business is one in PA that has a significant share of the division overall as you well know, Andreas. And on that one we have seen a short-term massive contraction and now we see a dampened demand, but the demand on the service side is okay. You have seen altogether in ABB, we had a 4% service growth in a difficult market environment, and PA definitely benefited from that one in the quarter.

Now in the equipment, we have never stopped R&D and PA is bringing out some very, very attractive new products. If you take for example, the new generation of IC ports, fantastic energy efficiency, they are being sold into the cruise ship sector. And when you look at the fact that basically all of China is going on a cruise, there is about 100 ships in the backlog. There is some field maybe can still sell. And then you have attractive technology, which is the newest, latest technology leading edge in terms of productivity and energy efficiency, you get paid on it. So altogether, the massive contraction has been dampened. On the one hand, with some order pattern that was running against, mainly the oil and gas and mining contraction. And then on the cost side, responsible cost management and good quality, attractive new products is the mix that we're driving to compensate the market headwinds that we're facing.


Next question comes from Ben Uglow from Morgan Stanley. Please go ahead.

Ben Uglow

I had a couple. First of all, again we're going through the different divisional margins, can you just give us more feeling or color around the electrification products? Nice margin expansion there, effectively on flat revenues. So what exactly is driving that and how should we think about it in the second half? That was the first question. Secondly, Uli, can you give us a sense of what's going on in China at the moment between your various businesses, how do you see the currently underlying trend in low-voltage versus discrete automation and what we're seeing in power at the moment? Thank you.

Ulrich Spiesshofer

So, Ben, let me get started, first of all, good afternoon. Let me get started with the EP development. Look, I think Tarak and his team are doing a great job. The margin is up 80 basis points despite pretty soft revenue is down on a comparable base, minus 1% and that's something that we have to appreciate and have really to give some credit to. Now in EP it's a similar story as I just told you on the PA side, on the equipment side. There is good new product coming out, if you take our acreage [adaptation] breaker that has additional functionality. If you look, the building automation and home automation range that Tarak has, which is growing and is very, very attractive to our customers. So altogether, innovation and new fresh technology for our customers and distribution partners is important driver there.

The second driver I would say is a front-end distribution and sales efficiency. We're bringing -- you might remember, 1st of January, we brought together medium voltage and low voltage under one roof in electrification. And we are only seeing the start of the efficiency gains and the fantastic collaboration opportunities that we have on the channel side, between medium voltage and low voltage, especially towards the industry, and has tremendous improvement opportunities ahead of us, and Tarak is managing them in a very, very responsible way. And also, he has done his homework on white collar.

Tarak has taken out like management complexity in the division. He has changed the business model in terms of who runs supply who runs demand and has actually said, simplified the division in a remarkable way. He has more hands at the customer than ever before. So altogether that's probably the key drivers on the margin development in EP. Now, let move over to China. China was a big area of concern for quite a while. We had contraction, we had reductions. And this quarter I'm really happy that we have total orders which are up 18%, and base orders which are basically have steadied out and are flat now in a still challenging market environment.

China is still going through a transition period from an investment or consumption-driven economy. But I look at China like a continent. And if you go to the different parts of this continent, if you go to the Hebei province, for example, I was very recently in Wuhan. And in Wuhan you see as many cranes as you used to see in the Middle East. The province, which has a GDP like Poland, is growing at 9%. So there is growth out there, we just have to find it, and Chunyan Gu and his team are doing a tremendous job in re-allocating resources. I call it Eastern Banana, along the West Coast, is soft at the moment. That's not growing as strong as it used to be. But there are many parts of China, which are progressing quite well.

Now, if I run you through the different divisions, EP is still facing some challenges on the spending on the process industry side, on the residential side, because the trend is down in China in this quarter. If you look at DM, basically robots is strong and the rest of the divisions, especially driven by the process industry is a tough one and we need to face that. If I take Process Automation, I talked about the marine part of Process Automation, which in this space is the only one which is up and the rest is really down to a very deep, weak domestic demand. There are still over-capacities in metals and cement and pulp and paper.

And then if you move over to Power Grids, the China base orders have grown double-digit. And we won a 300 million large order for HVDC in China from State Grid. And when you look what that is, that's again an [elementation] of our fantastic technology. It's 1,100 kV system that has never been done before. It has more capacity. It has higher reliability and lower losses than any other technology in this field. And naturally, when you have that you get paid for it when the customer takes it on.

In infrastructure utility grid side, China is still solid, India extremely well positioned with our leading-edge technology. On the process industries side it's soft. On the consumer-driven side, like auto, there is growth and in the [PC side]. So that's a little bit of granularity on China, Ben.

Ben Uglow

One quick follow-up on [Indiscernible].

Alanna Abrahamson

Ben, we have a long list of people, I am sorry.


Next question comes from William Mackie, Kepler Cheuvreux. Please go ahead.

William Mackie

The first, if I could come back to understanding a bit more of the moving parts within Discrete Automation and Motion. Specifically you've highlighted the jewel of the robotics business, growth and margin expansion. And last year, I note there was a high level of restructuring to implement the changes underway in the business. And yet, we haven't seen much margin expansion for the division. So, could you perhaps throw a bit more light on how the power conversion business is developing and also what lies ahead for us within the motors and generators business unit? That's the first area. And then if I come back to the bridge, is it possible for you to explain why given the benefits of Power Grids project execution that we've still seen a negative drag on the projects effect within the bridge for the Group EBIT? Thank you very much.

Ulrich Spiesshofer

So, I'll let the fun part on bridge to be answered by Eric, and I start on the DM side. And look, if you take -- it's a pretty broad portfolio. Let me go through business by business to help you understand what is going on. The robotics piece is going well, so we are happy, we are pushing that very strongly, we have fantastic technology coming out. When you win the Global Innovation Awards, when you get a lot of customer attention even from new segments, you know that you are well positioned. You should not be arrogant. And we are putting a lot of investments to make sure that we're really driving growth in this business in line and ahead of the market development. Our ambition is very clearly to further take share in this growing market in the robotics field.

When we talk about motors and drives, let me remind you ABB on the motors and drive side is very, very strong in continuous motion actuation. That means any continuous flow out in industry where we are particularly strong, and that's the area of mining, of oil and gas, of pulp and paper, which is significantly impacted by the market at the moment. So therefore, that was the main area of restructuring. If you just look at one example, the part of footprint in U.S. has been significantly restructured following the weakness in the market. And you take customers like Joy, who this morning got taken over by Komatsu, they were down significantly on their order intake and naturally we need to align resources with that, and that's something that we are doing in a responsible way and we take the restructuring that is needed to go through. The one thing that we misjudged last year now let me just repeat it, was really the service contraction. We would have never thought that the service activity in DM contract so much, especially in the oil and gas side. That happened, we were slow in addressing it but now it's fixed and we get back to the margin corridor in that field.

Now, if you take the power conversion piece, that's the solar piece, and you see the solar market booming and ABB is participating actively in that market. You see the rail, we have the rail business in there, and our sustainable transport solutions in rail are very strong. We have a high level of productivity and energy efficiency in our solutions so the customer demand is there. You also have excitation and rectifier solutions in that field, and actually that's something that's quite weak at the moment.

So altogether, I would say robotics -- in the end robotics is up, our motors and drives challenged by the process industry and in power conversion it's truly a mixed bag. And with that I turn over to Eric to answer your question on the bridge side.

Eric Elzvik

On the project margins in the bridge, which is a bit negative as you've seen in the bridge includes obviously, positive effects from projects that are going better. I think also negative effects of other projects that are going not as good as expected, or worse than last year. But also of course, this item includes the issues with the cable joints as we have alluded to earlier today.


Next question comes from James Moore from Redburn.

James Moore

I have a couple. Firstly, could I ask if you strip out the WCP, was the net of the normal 3 to 5 versus price similar, better, or worse than we were last quarter? So within that has pure price changed at all? And my second question surrounds your comments about the PIE heat maps. You talk about taking share to dampen end market headwinds. I wonder if you could say across the four businesses where you're taking the most market share by product or by region, or whether there are any pockets of share loss?

Ulrich Spiesshofer

On the white collar versus the regular cost saving, we are not disclosing the details of that mix. But as you have the 400 million commitment on white collar that we have made and as you have heard that we are very well on track, you can probably make your own calculation in that context of it. Now if you go through the PIE, let me go through -- on the one end by business but on the other end also, by region. The region that is most successful, there are two places in the world where we are more successful in implementing that and the management teams are probably furthest advanced in using PIE. The one is Europe and the other one is China. So, if you take the European piece and if you look at our growth pattern there, we went through country by country. And we had for example, parts of Germany where we particularly were weak in the past in terms of our setup. We’ve realized that we had given the market away too much to some of our competitors and we have invested now in the appropriate resources to gain market share across, for example the DM piece, for example the low-voltage piece, to make really sure we are driving that in an active way.

If you go further up, if you go to Finland, we have had a very, very good success in data centers. You might remember this is a country we have a lot of data center activities at the moment and we are focused strongly on that and we have a very strong development in taking share in that part of the European economy. So altogether, I would say the European -- Bernhard Jucker with his country managers and his local division and BU managers, they are really crunching the growth machine and doing a wonderful job in beating the market. If you look at the order development in Europe, especially the base order development in Europe, I think that shows very clearly that we're taking share in this region.

If I go over to China, Chunyan Gu and his team are really a role-model how you drive it. The first was the geographic segmentation. We realized there are many 1 million people cities in China, especially in the Mid and the West, the ABB was totally under-represented. So we reallocated resources from areas where we usually would have restructured them into that part and made sure we give that part of the market more attention.

Our efforts in food and beverage around the world are paying off. We have a dedicated team on that. We have hired the managing director of a food and beverage company at the end of last year. We made him in charge of our food and beverage program across all of ABB. And he's driving the heat map and the activities around food and beverage. And here let me just explain you a very concrete couple of elements. The one is making sure we take more of the existing portfolio to existing customers, increasing the share of wallet of customers. We had many, many customers in food and beverage where we basically had one BU active, and we are doing more on that one.

The second piece is really around the innovation side and thinking through. If you go to a Kellogg's muesli plant, for example, or Kellogg's cornflakes plant, you need wash-down equipment for the changeover in the plant. And not all of our equipment was suited to be used in a wet condition in a changeover, where you basically hose down the whole line on a changeover. So we have invested in R&D and we have invested in getting the right products out to participate in a market in that way.

And the third part, on the expansion side, yes look, food and beverage is a classic expansion element. But I can tell you if you look at the market of packaged food and how it's growing in India, the market of packaged food and how it's growing in China, it is tremendous. The rice sacks are disappearing and more smaller and smaller packaging sizes are coming and that's a tremendous opportunity for us to do more. So as you can hear from my comments, we drive this not only on a global corporate level, on overall segmentation, we have it broken down really on a general, local market understanding, on all the different industries, we are quite detailed and we work on that. And that's definitely a good story. We are not perfect on it yet. We still have countries which are not as far advanced in rolling that out. And you will see continued efforts around it.


Next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin

First, can I just ask more specifically on pricing, how that developed in Q2, whether that was much different to Q1?

Ulrich Spiesshofer

Is that your question? Okay, then I hand over straight to Eric.

Eric Elzvik

Andrea the price situation is obviously still with some price pressures we have experienced for quite a long time in the markets we are in, but I would say the level of price changes is not changing that much now between the recent quarters.

Andre Kukhnin

And secondly, you are very clear on your appetite to counterbid for Midea, but could you comment on any potential implications of what that -- Midea-Kuka, sorry, on particular implications on what that combination may mean for your business locally in China and in Europe?

Ulrich Spiesshofer

Yes, look, if you look at the situation, we have a clearer acquisition pattern, we want to buy in situations that has good industrial logic. We want to make sure when we do deals we create significant value for our shareholders. And we also want to make sure that the integration complexity is not too big, and there is a natural good fit. And we applied it on any situation, we have also applied it into context of that deal and you see the consequences of it. The combination of these two players is an interesting one.

Look, we are in China since many, many years. We are the leading robotics company in that field. We have great technology, we have a full blown local value chain, they've local R&D, they've local manufacturing, they've local sales and distribution, they have invested strongly on the engineering side and the application tender side. So I would say we're positioned strongly. And if you look at our combination, there is no significant short-term value coming out of that for Europe. And in China, since ABB has 20,000 people and a strong footprint in China, we will face the competition in a well prepared way.


Our last question comes from Guillermo Peigneux from UBS. Please go ahead, sir.

Guillermo Peigneux

Guillermo Peigneux from UBS. Just maybe a follow-up on the savings and the pace going forward. Very strong delivery in Q2, but I was wondering that if we stick to the previous plans, I guess, the momentum on the savings is actually far from its peak, and I was wondering whether we should see actually this contribution to increase further throughout 2016 and the beginning of 2017 even. Thank you.

Ulrich Spiesshofer

Yes, look, Guillermo, I think in a tough market environment that we're facing at the moment it's very, very important that you are extremely disciplined in cost and cash, and that you make sure you take all the opportunities that you have on the cost optimization and productivity improvement side as swiftly as possible. You might remember when we launched our Next Level strategy, we confirmed the EBITDA margin ambition over the cycle and yes, we have moved a little bit now we are 100 basis points up, but it's very clear that our ambition is to deliver further margin accretion over the years to come in our overall effort to improve the value creation in ABB. If you take the overall cost out on supply chain and quality and operational excellence, the 3% to 5% ambition stays unchanged and we will deliver on that one this year. If you take the white collar productivity piece, we are very well on track to deliver at least the 400 million this year. So, ABB altogether is becoming leaner and lighter. And the good news is you don't see that only on the cost side, you see it also in the agility side, you see it at the amount of time that we are spending with customers. Our NPS score this quarter is up in a significant way and one reason of that is also that we have, for example, sales people spending even more time with the customers. So your assumption to expect further accretion is correct. Let's see how that comes, at what pace and we are not giving any specific guidance on that one.

Alanna Abrahamson

Thank you, Guillermo. And with that we would like to conclude our Q2 results call. Let me remind you again that we have our Capital Markets Day here in Zurich on October 4, and we welcome you there. Thanks again.

Ulrich Spiesshofer

Thank you very much.


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. Good bye.

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