ABB Ltd

Hello and welcome to ABB's second quarter 2020 results conference call and webcast. The press release and financial information documents were published this morning at 7 a.m. and can be found on our website, along with this results presentation and further information related to the implementation of our buyback program. With me today to present the results and answer your questions are ABB CEO Bjorn Rosengren and our CFO, following our presentation, we will open the lines for your questions. Before we begin, I would like to draw your attention to the important information regarding safe harbour notices and our use of non-GAAP measures on slide two of the AVB presentation. This conference call will 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, let me now hand you over to Bjorn.

Thank you, Jess. And let me also offer a warm welcome to everybody on our call here today. I'd like to start with the highlights from the quarter. Since the beginning of the COVID pandemic, we have focused sharply on the health and safety of our people. This remains our highest priority, along with the continuity of our operations. We are pleased to say that the majority of our sites are active and operational at this time. As expected, the second quarter has been heavily impacted by COVID. At the same time, we were very focused on cost mitigation efforts. The group overall has shown more resilience than we expected, and Motion's results really stands out. In the Q2, we continued to progress our transition to a fully decentralized operating model, aimed at creating greater value for our shareholders, our customers, and our employees. The implementation of our new model is advancing wealth And we intend to accelerate the transition. Under the ABB way, our corporate center, which is now focused mostly on strategy and governance, is becoming even leaner. And our four business areas and 18 divisions are becoming fully accountable for their own P&L and operational balance sheet. Last week, our business reviews were conducted for the first time using our new scorecard-based performance management system. I firmly believe this system is already bringing a much-needed step change. It is central to our new approach to drive continuous improvements. Last but not least, We completed the investment of the power grids business. We will use the net cash proceeds to begin a share back program as planned. A lot of uncertainty remains and we still expect some challenging quarters ahead. At the same time, as you will see, we have maintained a clear focus on our way forward and on our transformation. On slide four, I would like to draw your attention to ABB's cost mitigation efforts. These are most important at this time to support profitability and converse cash. We have implemented wide-ranging measures, including the elimination of discretionary spending, including travel, modifications in staffing and pay, cutting consultancy and other external expenses and the postponement of non-critical investments. Reducing our SG&A expenses in line with the year-on-year fall in sales revenues is a very good tool to maintain profitability in the current environment. This chart shows that we have been able to do this quickly. As a result of the margins for the group, while lower year on year, turned out better than we expected. At the same time, we are being careful to protect our investments we need for long-term growth in our business areas, such as R&D and digital spending. The fall you see in our total R&D spend is due to lower R&D in corporate. This is in line with the ABB way. We have downsized corporate so that R&D is now owned by the businesses. We are working hard to develop further actions to address the possibility of a more U-shaped prolonged recovery. We cannot sustain all these COVID savings as some are transitory in nature, but we are looking for areas where changes in our way of working can be made sustainable. This includes, for example, making more use of virtual tools and remote sales and service on a permanent basis. Many of these actions go beyond what we had previously planned as part of the ABB simplification initiative. We are also working to accelerate the timeline for these savings. Now let's move to slide five. The divestment of 80.1% of power grids to Atachi on July 1st. was a real milestone for ABB. Teams on both sides made major efforts to finalize the deal in line with the timetable that we have promised. The transaction realized significant value for the shareholders. To remind you, the transaction has an agreed enterprise value of 11 billion US dollars for 100% of power grids. ABB will initially hold 19.9% equity stake in the joint venture, which is now operating as Hitachi ABB Power Grids. ABB has nominated two directors to the board, and we have a long-term supply agreement in place with the GAB. Finally, ABB has an option to sell its remaining stake to Hitachi three years from now. The divestment enables us to further simplify ABB. We can now apply our technology and expertise in markets that play to our greatest strength. We will do this with a number of well-defined, fully countable divisions, which are organized under our four business areas. In the future, we will also intend to follow up on these in a clean way. We'll come back to this in the Capital Market Day later this year. And with that, I will hand over to Timo to cover the quarter result in more details. Thank you.

Thank you, Bjorn. And good morning, everyone. Welcome to today's call from my side as well. On slide 6, you can see that trading conditions during the second quarter could only be described as challenging, shaped by the escalating COVID-19 pandemic. Compared to the prior year period, orders were 14% lower and revenues declined by 10% on a comparable basis. Our operational EBITDA margin was down 90 basis points year on year. As Björn indicated earlier, we are taking costs down through a combination of transitory and sustainable measures, including headcount. We remain committed to continuing rightsizing and to the fast delivery of the EVV OS savings over the months ahead. Our corporate and other operational EBIT are improved to 134 million cost, better than our run rate guidance for the quarter. However, we retain our previously reduced guidance of 550 million for the full year, which recognizes that non-core charges can, as has been the case in previous years, also create lumpiness in this line item. Operational EPS declined 35%. Basic EPS at 15 cents was up substantially, mainly due to the absence of the solar inverter's charge that was booked in the prior year period. Cash flow from operating activities was 680 million, and we expect resilient cash flow delivery for the full year. Let's move to slide seven, where ABB's regional and country order trends are shown in comparable terms. Order developments in the quarter mapped closely to the appearance of the new pandemic epicenters. In the Americas, orders dropped 23%, the United States declined sharply with motion, industrial automation, and robotics and discrete automation all heavily impacted. On a relative basis, electrification performed a bit better with orders down in the mid-teens on year-on-year basis. In Europe, orders were 14% lower with widely varying performance at the country level. Among ABV's largest markets, COVID continued to affect Italy, with orders down 9%. In Germany, orders proved resilient, with strong developments in the motion business, while electrification results were only slightly lower. Orders in Asia, the Middle East and Africa fared somewhat better, with an overall decline of 5%. China rebounded well as the country moved out of lockdown from the pandemic, with orders rising 3% year on year. Now let's take a closer look at the quarterly performance of each of our business areas, starting with electrification on slide eight. Electrification orders were 12% lower, with the business impacted by a fall in short cycle demand, which challenged the building sector and notably impacted the oil and gas and renewables markets. However, select end markets, including distribution utilities, data centers, e-mobility and rail, were relatively resilient. Revenues were 10% lower, impacted by short cycle weakness, which resulted in lower product sales, as well as some constraints to project activities. Electrification's operational EBIT-R margin contracted 90 basis points year on year, mainly driven by lower volumes. Margins were supported by cost savings and good pricing management in the product business. The turnaround of GEIS and the installation product division remains firmly on track despite the headwinds. Looking ahead, the third quarter results will remain burdened by COVID impacts, so we do not yet anticipate meaningful year-on-year improvement in either orders or revenues relative to the second quarter. We expect slight sequential improvement in margins. Next on slide 9, we have industrial automation, or IA. IA's orders declined 17%, reflecting a sharp downturn across energy and process industries, as well as a fall-off in marine, even if the business area benefited from select large order wins. The business has seen a significant part of its project pipeline shifted into the future, although, reassuringly, it has also seen virtually no order cancellations. Revenues were 9% lower as the pandemic caused a substantial drop in book and bill activities, particularly in services. On the positive, the team managed to complete some projects and services through the expedited rollout of remote connectivity and monitoring, as well as innovative commissioning. The order backlog rose 3% year on year. The operational EBIT R margin of 8.4% was 370 basis points lower. Margins were impacted by lower volumes and negative mix. The inability to carry out normal service activities as well as reduced service demand in certain areas have weighted heavily on the operating result. Looking forward, we expect third quarter orders and revenues to remain challenged. A few large prospects look more likely, so there is potentially some upside to orders. Revenues are expected to decline similarly to Q2 on a year-on-year basis. Margins are anticipated to trend sideways in the third quarter on a sequential basis. Let's then turn to motion on slide 10, which, as Björn mentioned, performed well in Q2. Orders declined 7%, reflecting a material downturn across several key end markets, including wind, cement, oil and gas, and buildings. However, rail did well, and chemicals was resilient. From a country perspective, growth in China was a highlight, driven by pent-up demand, particularly in dry products. Revenues were 1% lower, thanks to solid backlog execution. The order backlog increased 13%, year on year. The operational EBITDA margin of 17.7% rose 100 basis points year on year. Expansion was driven by strong cost mitigation actions and favorable mix, which more than offset lower volumes. Looking at the quarter ahead, motions orders are expected to show continued relative resilience sequentially, while revenues are expected to be slightly more impacted. We currently assume the favorable mix seen in Q2 is not repeatable, and therefore margins are expected to soften on a sequential and on year-on-year basis. On slide 11, we turn to robotics and discrete automation business area, or RA. Orders for Q2 were 25% lower, with a sharp and broad-based decline in key end markets, including automotive, general industry, and machine builders. Also suffering from a tough large order comparison, all regions were challenged, led by Europe and the Americas. Revenues declined 23%, heavily impacted by constraints to system business and service activities, as well as lower product sales. The order backlog was 4% lower year on year. The operational EBIT margin of 6.8% reflects the steep volume decline as expected, but as well mitigated by strong cost actions. Looking ahead, select end markets such as food and beverage, consumer electronics and logistics are showing green shoots. However, automotive and automotive related industries are still under tremendous pressure. IRA's orders are expected to remain challenged year on year, however benefiting from an easier comparison base. Given the softer order backlog, revenues and margins are likely to remain similarly challenged sequentially in the third quarter, with a more visible recovery only in the fourth quarter at best. Continuing on slide 12, we lay out the pillars of our multi-year capital structure optimization program. As planned, ADD will return to shareholders the 7.6 to 7.8 billion of net cash proceeds from the sale of power grids through a buyback, with our initial 10% program commencing tomorrow. At next year's Annual General Meeting, we intend to request shareholder approval to cancel the purchased shares and to outline further programs as we progress toward the full figure. At the same time, we are implementing a number of deleveraging actions, including a review of certain defined benefit pension structures. We have fully repaid a short-term revolving credit facility of €2 billion and plan to repay the €1 billion bond maturing this October. All in all, ABB continues to focus on driving better quality of revenue, on maintaining strong balance sheet and good financial flexibility, and most importantly, on sustained and improving returns to our shareholders. And with that, let me pass back to you, Björn, for closing remarks.

So, thank you, Timo. I will now summarize. On the left of this chart, you can see the short-term outlook for our end markets. While improving slightly in some areas, it continues to be much weaker than we would like. Most markets remain impacted by the pandemic, and some also by the weaker outlook for oil prices in the longer term. But we will continue to make the most of the opportunities where we see them. For example, in transportation and infrastructure, distribution utilities and certain consumer-led industries. And in general, keeping or gaining market share. At the group level, we expect to see some improvements in the year-on-year order decline already in the third quarter. But we expect revenues to remain strongly impacted year over year, at best recovering somewhat in the fourth quarter. We expect the operating margins to be steadier in the third quarter. We remain committed to protect the health and safety of our people and to closely collaborating with our customers. We will also continue to mitigate the effects of the pandemic. Our transformation is moving ahead under the ABB way. We are prioritizing improvements in the group's financial performance with a clear focus of profitability in underperforming divisions. We are already trying out our new scorecard systems. We are busy with our ongoing portfolio review and in November we will host the Capital Market Day. This will provide you with more details on the evaluation of our portfolio and on the strategies of our business areas and divisions. This leads me finally to the strong commitment we have made to deliver attractive returns to our shareholders. You saw that this morning with the announcement we are starting our share buyback program. Thank you for your attention. We are now ready to open the line and we look forward to answering your questions.

Thank you Bjorn. Operator, may we have the first question from the lines please.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question comes from Shane McKenna from Barclays. Please go ahead.

Good morning, Bjorn, Timo, and Jess, and thank you very much for taking my question. Within EL, you flagged resilient pricing and an improvement in GIS and installation products, but how much of the margin was impacted by the exit of the solar business in this quarter? And just on that better pricing, is that a reflection of the rollout of new products at GIS under the best of both And if you can give us any commentary on inventory level in the distributor channel, especially in North America, because we saw some pre-buy heading into the end of Q1. And then just one final question. On the $234 million of net savings compared to the $100 million in the bridge in Q1, how much of these savings are COVID-19 related and therefore, as you say, transitory in nature and how much are actually OS related? And if you can't give us the exact number, maybe a feel in terms of percentage, is it 50% or that would be great.

I think Timo can answer this question.

Okay, so maybe I'll start with the last part, which is the bridge. So we have about 130 million more savings, as you can see sequentially to Q1, and a couple of tens of millions are OS-related, so there is an improvement also on the long term, but the bigger part of these savings clearly come from the COVID-related situation, particularly travel and then some other short-term savings measures, so that's really the mix there. And then on the EL business, if I start on that one as well. So basically we continue to have this little bit over 50% uplift from the solar exit going through Q2 numbers. So you are right to point out that that is helping in the EL. We have inside EL a slight negative mix. I just want to mention that because the EP, IP, IE installation products turnaround is firmly on track and also the GEIS is firmly on track. So that really sort of squares it. On the inventory, we are seeing overall a good performance in our inventory. We are releasing cash from inventory, but this is coming mainly from lower volume. And then if we look at inventory days outstanding, we do not have such a good performance. I want to be clear on that as well. So that's an area where we need to work through Q3 more. So the good cash in networking capital is more coming from lower volume of business than actually the inventory days or the receivables days going down.

Thanks. Thanks, Shane. Next question, please.

The next question comes from Andre Kuknin from Credit Suisse. Please go ahead.

Good morning. Thanks very much for taking my questions. I've got a broader question and a quick follow-up, please. The broader question I have is on your forward order book kind of funnel indications. I guess it's mainly related to electrification and industrial automation businesses that have that. And what I'd like to ask is, What are you seeing in that in terms of customer indications and how is that activity developing as the kind of economies restart? We're hearing a lot of concerns about kind of an orders air pocket developing for, you know, in six to nine months' time, and hence the question on the funnel. And the quick follow-up I have is on motion mix that you flagged in the quarter. Was that all about China or was there something else into product as well? Thank you.

Yeah, the one when we talk about motion a little bit. Yeah, China is, of course, very good. And there is a mix also. I mean, the drive products really sticks out here with super good margin and also good deliveries within that part. So it's a clear improvement in mix to more profitable part. And, of course, good execution also, I would like to say, and good savings here. I think on the order side going forward, I mean, it is at the moment quite difficult to draw any big conclusions, but we try to give you some kind of guidance going forward. And what we see from our businesses is that somewhat improvements in order should be seen while it's not really falling through to the revenues in Q3. So that's pretty much in line with what I think you've seen during this present quarter. It's correct that the US is the challenging part of the market. We are down 23% there, which is of course significantly more than both Europe and Asia at the moment. So we need to see some kind of improvements also moving forward in the coming quarters. That's quite clear. I think you were reflecting a little bit to electrification and IA. Yeah, first on the electrification side, I think it's in North America, very distributor-oriented, and it's correct that there has been been a challenging part, and it will take a little bit time before that is bouncing back, I would say. On the IA, it's more project-oriented. Where we've seen the biggest headwind here is actually service, which should be the other way around from my perspective. You know, I'm a big fan of service business, which normally is very resilient in the downturn. In this pandemic, we've seen actually a the way around. I mean, it's difficult to conduct surveys and certain segments like marine, for instance, but also in turbo where we are really not getting the service through, which is actually giving us a very negative mix. So that's being affected. I hope that answers some of your questions.

Thanks, Andre. We'll move on now. Next question from, I think it's from Martin Wilkie. Go ahead, Martin.

Thank you. Good morning. It's Martin from Citi. The first question is around customer spending and robotics. You've kindly outlined by end markets where you're seeing some better, some worse. But generally, there's a lot of talk about automation as a theme accelerated because of COVID, to de-risk lockdown, to de-risk social distancing. Are any conversations you're having with your customers indicating that there could be a structural step change in the automation market because of COVID? And even if you can't necessarily see it in orders today, are those kind of conversations beginning to be had? Is that something we can look to over the next year or so? Thank you.

Thank you, Martin, for the question. I mean, as we've seen, robotics is where we've seen the biggest headwind. And that's, of course, driven a lot from the automotive industry that had a total shutdown during the quarter. So, of course, very, very tough environment. On the other hand, we've seen more connected robots than we've ever seen before. I think the connectivity has gone up over 400%, actually, recently. So this is a drive that robotics have done also to make it easy to access, but also to monitor the robots externally. I mean, there is a lot of discussions regarding digital solutions at the moment and the way to remotely monitor and operate products. That is quite clear. We feel pretty comfortable that the trend will accelerate. And I think I read that also some places that, you know, we are actually moving 10 years forward, you know, in accelerating when it comes to digital activities in the market. So I think it's a little bit early to say that this is going to be. We only had a couple of, I mean, it's only three months so far with COVID. How it's actually going to be, I think the future will tell. But we'll definitely, in our businesses, try to utilize the opportunity to push for more digital solutions with our customers. I hope that answered.

Okay. Thanks, Martin. And next on the line is James Moore from Redburn.

Yeah, morning, everybody. Hi, Team IBM. I've got some questions on margins, if I could. You mentioned in the electrification slide that GIS and Thomas & Betts turnarounds are on track. I wondered if you could put a rough picture on their margin developments in the first half compared to the total ELBs. which is sort of down 100 bits. I think from memory on the electrification day, you talked about Thomas and Betts having a low double-digit margin and TIS around 4%, and with a longer-term ambition to get both towards mid-teams.

I just wonder, when you say that they're progressive, are they actually up year on year, or is it just that they're down less than the... James, I'd love to talk about Thomas and Betts, because I think... They are one of the divisions that are sticking out quite remarkably during this quarter. Let me explain to you a little bit. Thomas Best is very much a North American-focused business, as you know, which means that the orders and the revenues are pretty much in line with what we see in the overall US, which is quite a dramatic drop. On the other hand, they have managed to actually improve their margins during this quarter, which I think is an extraordinary job. And I think they are moving in a good pace towards the target that we have set for our divisions. I hope that gives you a little bit of a feeling. But, yes, I think the management has the right focus and they're taking the right mitigating actions, you know, to improve the performance of this business where it should be. I didn't give you any numbers, but it's good numbers. That's great. And GEIS, a similar story?

Yeah, Timo here. Maybe I'll take the GEIS part because, as we have said earlier, we are not following GEIS anymore as a separate business or a division. It is integrated to three EL divisions, which we then focus on now improving the performance within GEIS. What we can say about GIS is that the integration continues to be fully on track and we are slightly ahead of the cost energy plans which we set out when we announced the DLIE about 120 million within two and a half years and 200 million within four and a half years. Also, the consolidation of the factories is continuing as planned. we are having 10 closures by now, as we have said, out of 28 and look to do eight more during this year.

And I think the work is going according to their plan. And I think it's quite extraordinary that they managed to even to drive these in these tough COVID times. And they are pretty determined that they need to get it through and to get the margin to the right level for the whole electrification.

Okay. Thanks, James. And we'll go next to Ben Aglow from Morgan Stanley. Thanks, Ben.

Well, great. Morning, everyone. Thank you for taking the questions. A couple of questions. First of all, Bjorn, could you just drill down a little bit on China in terms of the trends that you were seeing throughout the quarter? Some of the Swedish engineers said sort of have been indicating that there was pretty good pent-up demand coming out of the lockdown, but that we've seen a slight fade from April, May onward. Is that consistent with ABB's experience, or are you seeing something different? And then my second question is for Timo. Timo, could you give us a bit of help around operating cash flows? Good number in the quarter at $680 million. And my impression from your comments is that that's expected to go up. If I look at last year in the second half, in the continuing operations, your run rate was ballpark $2 billion. And obviously, we've got much more top line pressure this year. But if I look at that $2 billion, there were also kind of one-off factors in it. So I guess what I'm asking is, can you help us kind of get from 700 million per quarter toward a billion. How big a step up might we be seeing in the second half?

Okay, shall I start talking a little bit about China? And it's correct that during the end of Q1, but also during Q2, we've seen a strong and good recovery of China. Totally China is up 3%, but it varies a little bit between our businesses. And where we see the best China development is actually in motion, but also rectification is doing quite good in China. Little bit more challenging on the industrial automation side. And in robotics, we had some good orders there within the electronic industry. So that's pretty flat, actually, compared to the year before. You know, China is... a big market for us, about 15% our revenues, and we have quite a lot of operations there. And I think this is the only part of the world today that we still see growth in the market. If that's sustainable, it's very difficult to draw any conclusion. I don't think China can stand alone to drive growth. I think it's also depending on that we start seeing some better movement both in North America as well as in Europe.

And just on that point, Bjorn, did it stay pretty good throughout the quarter? Is this the kind of trend that you felt was pretty continual or was there sort of a pent-up demand and then a fade? That's my question.

Yeah, I think it stayed quite good, really. I think the division, the business areas that have performed well, they had a good development through the quarter. Some of them had somewhat weaker in the end of the quarter, but I think stayed up pretty well.

Okay, thank you. Yeah, maybe I'll bridge from that to the cash question, as it was in my prepared remarks as well, so In motion in particular, and this is what Björn mentioned earlier, also on the dry products, there we had a bit of a pent-up demand situation, and that's why we are saying that we would not expect similar positive mix to continue to Q3. So in that area, we saw some of the similar development which you described. Then on the cash side, so the... operating cash flow of 680 million first on the dynamics of that one. So we are, I would describe it, happy to see it come through because we were expecting this to happen. But we are not particularly pleased on the overall networking capital management situation when you measure it on, for example, days of sales outstanding or an inventory. So the cash is really coming through more because we are getting revenue from a higher volume level and we have further work to do on the net working capital then going into the second half. I mean, I'm not going to give here any cash guidance, but I'll just mention that when you look at our cash flow dynamics in general, we have had, first of all, usually when we have a revenue down year, we have a better cash flow because it comes from net working capital release, And then second half tends to be always clearly stronger. So that's why we are saying that we expect a resilient cash development.

Okay, understood. Thank you very much. Very helpful.

Thanks, Ben. We'll take a question now from Alex Virgo of Bank of America. Go ahead, Alex.

Thanks, Jess. Good morning, everybody. I'm sure you all well. Thanks for the question. I just wanted to pick up a little bit on your comment, Johan, about the first divisional review under the new KPI framework. And I wondered if you could just talk a little bit about management attitudes, employee attitudes, and how well that is kind of bedding in, because that's pretty central to your ability to accelerate the implementation of the ABB way. Thank you.

Thank you, Alex. Yeah, I mean, we have continued. I actually spent during this quarter quite the incentive time to go through most of our divisions and their strategies and so going forward. And I think the attitude is very good. It's, of course, not always attitude is enough to deliver a fine result. So I think we will, you know, proof of the pudding will come in the coming quarters and the coming years where the businesses need to improve. As you've seen with our bubble charts, we have some divisions are, you know, extraordinary well-performing and quite impressive, while we have some divisions where need, might have some a little bit more headwind, but also need to improve a little bit in their operating model and the way they operate. But I think overall, I feel pretty optimistic, and we'll talk a little bit about these businesses when we meet in November, where we will talk a little bit more about the strategy, you know, to reach our target for the first three years. I mean, that is the importance, and then, of course, the execution of that. That's up to proof.

Okay.

Okay, thank you.

Thanks, Alex. Next up, Will Mackey from Kepler Chevro. Are you there, Will?

Yes. Good morning. Thank you, Jess. Good morning, Timo Bjorn. My question, my first question really directs, is directed at understanding a little of the market behavior within oil and gas, marine and conventional generation, and also the machine building segment. The question is more directed towards the divisions. Could you give us some insight or flavor as to the performance of turbocharging and measurement and analytics relative to the industrial automation division in the quarter? And also the same question to the robotics and discrete, sorry, the machine automation segment within robotics and discrete. So how have those divisions performed relative to their business areas in Q2, which, of course, feeds into the end market question. And the second question is directed towards Timo, and specifically in relation to power grids. I note the comments in the notes to the accounts, but could you give us a flavor for the actual cash impact, pro forma at least, from the completion of power grids that you saw in the first part of July after closing.

Okay. Maybe I start a little bit to talk a little bit about our market. I mean, you've seen quite clear that when we look at four business areas, you've seen excellent performance in motion, good performance in cash, in electrification, and then you see a little bit more challenging, of course, in industrial automation and robotics. Robotics is pretty clear. It is what we said before. We will have a lot of headwind, not least from the automotive industry. On the other hand, I think they've done a lot of good mitigating actions, and without those mitigated actions, we would probably not show any profit whatsoever. I think that's probably been the most challenging during the quarter. On the industrial automation, where we normally come back, it's so different businesses, and let me talk a little bit about them here. One which I think sticks out, maybe from your perspective, it looks a little bit soft in performance. I think that is very much related to a number of these businesses. You mentioned Turbo, which is one of them, and This is what I tried to say before, is that normally in a downturn, service is actually the resilient part of the business. A business like Turbo delivers excellent results also when you sell less of the product. This downturn is different. And when they, I mean, You know, turbo, the biggest part of the business is actually service, as you all know, and they're doing it globally. And they are a lot in the marine market, which has been heavily affected, and they are on the energy side, especially in remote areas like the Caribbean, for instance. You know, most of all the power generation in these islands, which is very much tourist islands, is driven by our turbo compressor sitting on these power plants. And there has been less activity when it comes to tourists and so on, which has a certain effect. So, yes, it has been a hit on performance on the turbo. On the marine and port is another one which is affected on the service side. It's very much dependent on the cruising industry. service, you know, the old cruising ships have been parked at the moment. And this is a huge income, of course, from our AC pods and our electrical propulsion systems. So that on the service side. So when you look at these businesses in industrial automation, it is actually a revert from a normal downturn. We have a negative mix because of less service. And this is the first time in my career that I'm seeing service not being resilient in a downturn, but that is COVID and we have to live with this part. As these markets opens up, we should be able to see improvement. The one holding up, I think, better than the other businesses there is actually energy markets, which is doing quite well and also process industries, which is very much related to paper and pulper and the mining side is kept up. You asked also about measurement and analytics. I think there is also a little bit loss in margin from the oil and gas industry. We have certain products which strike big margins in the shale gas industry, which has been hit. Doing good in the analytics, a little bit more challenging in the service and measurement part of that business. So improvements to come. I would say it's necessary. I hope this gives you a little bit of a feeling of the situation within industrial automation, which I think is the one we need to dig more into going forward.

Okay. Thanks very much.

Now we have Tim also.

Oh, Tim is still. Sorry.

There was also the power grid gas question. Thank you, Will. So I presume you are now referring to the impact after Q2 closing, and we are, of course – not now disclosing the whole power grid stuff because that's a Q3 item for us. So I can just talk about some puts and takes here. So clearly we were getting the cash in as expected. And as we have also said, there are some delayed closings, primarily India. So there is still further cash to come related to the transaction during the coming quarters from that escrow system. Then we did also get a positive payment on networking capital, and I think that's in line with expectations because you can follow that the power grid cash development has not been, let's say, super good during the pandemic. last quarters so there was a bit of a positive net working capital adjustment coming in as well and then it's worth taking into account that of course some of the costs on the separation or majority of that we have already spent and we are now getting paid for that so with that you can see that the amount is somewhat bigger than for example this 7.6 to 7.8 buyback amount so that much I can say and then also we are still continuing to expect this approximately 5 billion pre-tax gain from the transaction going into Q3. Thank you very much.

Great. Thanks, Timo, and thanks, Will. And we'll take a next question from Andres Ville of JP Morgan.

Good morning, everybody. Thanks for your time. I have a question to follow up on the earlier discussion on the cost savings issue. What are you planning on the more structural side? I've seen that you reduced the guidance for restructuring costs for the year despite the COVID impact and also continued impacts from that on your revenues. And the second question I have on the capital allocation, you mentioned the buyback and the pensions. what are you planning to do on the pension side in terms of de-risking? Is this extra cash contributions or is that closing some schemes you have? Maybe you could elaborate a little bit on that. And just to clarify on the buyback, the current treasury shares that you hold, which are basically subtracted from the 10% buyback to next March, Is that just that those, that equivalent amount will be bought back later, or do you count the treasury shares towards that announced buyback?

Okay. Let me start up a little bit on the cost-saving side. First, I think, yes, it's correct that we take a lot of short-term measures. Some of them have just become because we are not traveling in the same way and we are not doing so much activities. I think the rest of the year will be a lot of these cost-saving activities due to limited amounts of traveling. Might be some coming up a little bit going forward. The important thing from my perspective on the cost structure, that is really related down to the divisions. And divisions are responsible for their fully cost, and that's where you have all the costs now in ABBs. That means that our 18 divisions will take the necessary actions to be able to meet the demand that they are seeing in their end markets. This is a normal way of operating in a decentralized way. Some of the divisions are seeing good demand and seeing good recovery. They will not need to take the same kind of measures, while other markets, as we've tried to explain here, some of the energy markets, oil and gas, automotive, and so on, there needs to be taken more actions. And the divisions have already started this. So I feel very comfortable to deliver on the numbers that we have committed ourselves going forward, and the divisions will take these actions. But, you know, the COVID is not over yet, so we will have a lot of the short-term also in the coming quarter.

Yeah, maybe I'll just chip in on this cost-saving topic because you are correct. We took the normal restructuring amount for 2020 down with 20 million. It has nothing to do with the fact that we actually are looking to reach the 500 billion cost savings ahead of plan, as we have said earlier. So we are making good progress on that. And as I said, we have more also on the OS-related run rate savings in our bridge relating to an earlier question. So that's on that. And then on the value maximization on the deleveraging. So what we are doing on the pension side is that we are simply looking, do we have any plans in the overall global ABB pension system where we could with a more efficient deleveraging, i.e. if you would spend a dollar can you deliver it more than a dollar so that's the kind of thinking and there are certain areas where this could be possible that's why we wanted to flag it we are simply doing this on a value maximization basis and we would not do it if it does not yield a better result for the company than simply paying back debt so we will be very methodological to drive value with this and they are partly related on how different parties on the market account for pensions, both on the liability discount as well as on the assets. But if we do some of this, we come back to that in Q3. And then finally, on the buyback, I mean, we're simply flagging that the company under the Swiss rules can never hold more than 10% of its own shares. And so you have to take the treasury shares now into account because we already have them before we start to buy the buybacks. We would then cancel the shares, or that's the proposal at the moment, to the AGM next spring, and then we would announce further actions. But I want to highlight that we have defined the overall buyback as a dollar amount of 7.6 to 7.8 billion.

Thank you, Andreas. And a question now from Gael de Bray of Deutsche Bank.

Yes, good morning, everyone. I've got two questions, please. The first one is about motion. Can you just come back a little bit on what's driving the success of motion? Because I think there's more than just the China's restocking effect for drives. So can you talk a bit more about what's changed in the go-to market, in the product offering also perhaps over the past couple of years? and in which regions specifically you think you're getting market share the most. And then the second question is about electrification products. I'd like to understand the reasons behind the relative outperformance of EP versus at least the original expectations. I think you had initially guided for a 20% drop at the start of the quarter. For sales, more recently, perhaps it was supposed to be closer to mid-teens, but eventually the drop was only 10%. So, I mean, my question is, in which geographies and in which products have you been the most surprised towards the end of the quarter?

Okay. Maybe I can start with the motion question, and then Timo can take the electrification side. Yeah, I agree with you. It's a quite impressive performance of motion, and I think it's really developing quarter by quarter in a very positive way. There are a lot of factors that are doing well. I think one area is that the drives business, where we have a very strong market-leading position, is developing extremely well. And I said China is of course one important power market, but there are other markets and other regions also where they are doing quite well. So that's one. And if you look at the technology I think that we have in the drive business, it is a leading. I think there is no one who has more connected drives in the world that ABB has. I think the technology is actually leading. Another thing that is actually developing very well overall is the railroad side, actually the traction business. And that is, you know, a lot of train investments have taken place in Europe. And we have, of course, one very strong partner, which is Stadler, as you all know. And they are developing extremely well in the market. And we have received some really good orders and some good execution during that period. In motion, I think maybe the way you've seen the most headwind part, I think that's more related to the Dodge business, which is a North American business, which is natural, where you have a much tougher business, while the other companies, divisions is actually doing quite good. Services is actually also performing quite good. And I think they're taking a lot of these remote measures, doing service also online, supporting the companies with the business. So overall, it's good performance. I hope we can talk a little bit more about this when we meet in November. Let Morten give you a little bit more in-depth. And then Timo, maybe you want to talk a little bit about the electrification performance.

Sure. Sure. Thanks, Björn. And thanks, Gael. So, I mean, going into the quarter on this COVID situation, of course, it was very difficult to see, first of all, what was going to happen. And it continued like that for a bit. But then if you look at some puts and takes, what then happened in the EL business. we had a proportionately, first of all, on the division level, slightly better performance on distribution solutions, which also impacted the mix because it's more project-based. And this is also coming through, as we mentioned, that the distribution utilities market tended to be slightly higher than, or let's say proportionately better performing than some of the other markets. And then when you look at end market by end market, we, for example, had a better than expected distribution resilience in Germany in electrification, whereas then US, of course, was difficult, but maybe a bit less difficult than in some of the other businesses. And then India was clearly more down than we expected. China was okay for EL. So those are some of the dynamics going on during Q2.

Great. Thank you. And as we are coming up to the end of our hour, we'll take a last question now from Guillermo from UBS.

Hi, good morning Guillermo from UBS. I wanted to ask on savings again. I guess, Timo, you referred to, roughly speaking, 100 million savings from COVID and the temporary nature of those. But I wonder whether there's actually somewhere, you know, of that 100 million, some things that you learned that you can do differently and therefore some of those savings will be in a way more structural than just temporary. That's the first question. And then the second question is regarding the automotive, excuse me, pipeline. What do you see in the final? Is there any kind of activation of projects, especially coming from China, as you speak? Is there a recovery at some point that we could foresee looking for, you know, looking into these kind of pipeline negotiations or final negotiations that you see? Thank you.

Thanks, Guillermo. So, of course, we are trying to see if some of this could be made sustainable, maybe on the travel and other areas, but I simply wanted to highlight that also some of this cost will come back. So I can't give you a number at the moment what could be that. We continue to track separately the OS savings from the other savings, as I've said earlier, and we are well on track to reach that 500 million run rate target. and I think very important is also what Björn has said earlier that now the management of the cost base is moving more and more to the divisions and we have also made the change which we announced that now fully the digital activity as well as fully the R&D activity moves to the division so even if you for example see that our R&D is down now I want to highlight that R&D actually in the in the business areas is slightly up even during Q2. So we're really moving the responsibility and accountability towards the divisions and more of the cost savings activities will then in the future happen there and of course will be dependent on how the markets where they are operating are developing.

And you had the question also on the automotive industry. I mean, that is the segment that we have seen the biggest challenges. Q2 was, of course, the toughest as the whole automotive industry was actually shut down during quite some long time. And things are starting to move, of course. We've seen, especially in China, that the automotive is picking up somewhat. Otherwise, I think in Europe and North America, it will be challenging also in the coming quarter. it's a question to say how many of these larger projects in the world that will be realized. But I think when we look at the automotive thing, we feel very comfortable that we are keeping our market share in these businesses. I think that's what we feel is a very important part, and that means when the market comes back, we should be there also.

Right. Thank you. Thanks, Guilherme. Thank you. Thank you, and thank you to everybody that has joined our call today. IR, as always, is available if there's any follow-up, and we'd like to wish any of you that are having a vacation or staycation or anything similar a very good summer. Thank you very much.

Yes, same from us. Thank you. Bye-bye.

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