Abb Ltd

SIX:ABBN

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the ABB Q1 2020 Results Analyst Conference Call. I'm Andre, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Jessica Mitchell, Head of Investor Relations. Please go ahead, madam.

[Jessica Mitchell, Head of Investor Relations]

Hello. And good morning to all. Welcome to ABB's First Quarter 2020 Results Conference Call and Webcast. The press release and financial information documents were published this morning at 7:00 a.m. and can be found on our website, along with this results presentation. Following our presentation, we will open the lines for your questions. I am pleased to introduce ABB's new CEO, Björn Rosengren. And also with me today is our Chief Financial Officer, Timo Ihamuotila, who is going to present our results in more detail. Before we begin, I would like to draw your attention to the important information regarding safe harbor notices and our use of non-GAAP measures on Slide 2 of the ABB 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. And with that, let me now hand you over to Björn.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Jess. And let me also say hello, and very warm welcome to everybody on the call. My start at ABB has not been exactly as I expected when I took on the challenge as being the CEO of ABB. Yes, it has been a challenging time for all of us. On the other hand, wrestling with the rapid spread of COVID-19 has given me the opportunity to understand the quality and the resilience of many of our businesses. Nevertheless, the COVID-19 has created a very tough set of trading conditions for the quarter and also for the coming months. First, some highlights from the quarter. Order growth surprised on the upside, helped by large order, which more than offset somewhat softer short-cycle demand in the later part of the quarter. This doesn't help our revenues right now, but makes us more resilient over the medium to long term. The book-to-bill ratio for the quarter was 1.18, which means that the orders are 18% higher than the revenues. The challenges from the COVID-19 first affected China and then spread to Europe and the rest of the world. The pandemic created a huge challenge, both to keep our employees safe and to maintaining our commitment to our customers, but also to keep our around 200 factories and operations up and running. It helped that China managed to reopen so quickly and that we could learn from the early experiences how to secure a safe working environment in all our plants. The way our teams have handled the crisis is quite an achievement. However, supply chain challenges and mobility restrictions impacted our ability to deliver products, complete project installations and carry out services, which affected our revenues, and eventually, our operating margins in all our businesses. On a positive note, we have made very good progress with the carve-out of the Power Grids business and target to close the transaction at the end of Q2 2020 as planned. Although I took over as CEO on March 1, I was fortunate enough to be able to meet most of our key leaders as well as visit our operations in India, in the U.S. and Europe already in February, before the COVID-19 restricted our ability to travel. Since the start of the coronavirus outbreak, the health and safety of our people has remained our first priority. The teams have worked very hard to maintain business continuity and to support our customers and partners around the world. The speed, agility and accountability in which our organizations have acted during the crisis is a true proof of the commitment in our workforce and power of the operating model. The lockdown has enabled me to spend more time with our senior team, discussing how we want to operate going forward. And I do look forward to sharing more thoughts around this at June 10. Needless to say, my first impression of ABB is very positive, thanks to our people and great technologies. I am confident that we will see our way through these times and emerge even stronger and continue our journey to meet our long-term financial and sustainability targets. That having been said, let's move to Slide #5. The extraordinary macro environment can be described as very challenging. Purchasing Managers Index have plunged around the world, with weaker short-cycle demand led by the automotive sector and other consumer-facing sectors. In ABB, we have seen strong large order in the transport and in part of the process industries, suggesting a bit more resilience in some later-cycle end markets. Although economic conditions began to stabilize in China during March, they have declined materially in other regions, with many forward-looking indicators pointing towards a global recession of uncertain magnitude. On the supply side, although the majority of our production capacity remains intact, constraints have started to emerge in some of our supply chain. Restrictions on travel and site visits have limited our ability to provide services, which traditionally holds up better during recessions. They have also slowed down many project installations, making this economic downturn faster and more severe in character than prior recessions. We have yet to see the full effect in our results. As a leadership team, we have taken very proactive approach to address these major challenges, as outlined on Slide 6. We have put health and safety at the center of our response to lead by a group steering committee and country task forces. The Board, but also the Executive Committee, have taken a 10% reduction in compensation during the crisis. And we are supporting the communities in which we work, with both essential supplies and critical power equipment and services to the health care facilities. Operationally, we are focused on delivering critical goods and services to our customers. And we are making use of the digital channels and services we invested in over the years. We are cutting costs by reducing capacity, limiting discretionary expenses, like travel and professional services, and delaying nonessential CapEx investments. It is clear that our decentralized operating model, with our businesses being more accountable, are taking the message to adjust their operations quickly to meet the market demand. Let me now hand over to Timo to cover the quarterly results in more details. Please, Timo.

[Timo J. Ihamuotila, Executive VP & CFO]

Thanks, Björn. And welcome to today's call from my side as well. On Slide 7, you can see total orders of $7.35 billion were up 1% year-on-year on a comparable basis. Revenues of $6.22 billion were 7% lower year-on-year on a comparable basis, mainly reflecting a drop in product demand due to the COVID-19 pandemic, at first, in China and then across other parts of the world. Mobility restrictions also constrained project delivery, systems installations and service activities for our engineers. In turn, all our businesses reported lower margins as expected. And the group's operational EBITA margin contracted 100 basis points year-on-year to 10.2%. As part of the Power Grids carve-out process, ABB has eliminated the majority of stranded costs in the continuing group. Remaining stranded costs will be resolved in 2 ways: where applicable, they will move to the Power Grids joint venture with transition service agreements; the rest are essentially dis-synergies and will be dealt through the ABB-OS simplification program. Operational EPS was 2% lower, while basic EPS of $0.18 declined 30%. The main difference between the 2 calculations comes from losses on commodity and FX hedges and from more nonoperational costs in discontinued operations. Combined, these totaled approximately $160 million in Q1 2020. ABB's earnings also benefited from a lower effective tax rate of 19.5%, which was driven by certain tax provision releases. Cash flow from operating activities was negative $577 million, including outflows for employee incentive programs, which, in 2019, were paid in the second quarter, in addition to lower income from operations and less favorable timing of tax payments. This was partly offset by improvements in working capital management, including better harmonization of payment terms for trade payables. Moving to Slide 8, in which ABB's regional and country order trends for the first quarter are illustrated. Order developments were strongly influenced by when and where the coronavirus appeared during the quarter. In the Americas, orders were up 2% against a tough comparable period. Robust growth was underpinned by large orders. In the United States, orders were up 2% on a comparable basis, with the country not seeing COVID-19 impact until very late in the quarter. In Europe, orders were 5% higher with variable performance at the country level. Countries in Europe that were most deeply affected by COVID-19 during the quarter, for example, Italy and France, had order declines in the region of minus 20% year-on-year. In Germany, orders were lower by 4%, while orders were mainly up in other Northern European countries. Last, but not least, you can see orders in Asia, the Middle East and Africa were 7% lower. China's performance, at minus 16%, warrants special mention. In Robotics & Discrete Automation, lost production and curtailed system installation and service activities were combined with already challenged end markets such as automotive. That business saw order declines of over 30%. In Electrification, orders were down more than 20% in spite of healthy rebound in demand in March. Motion was similarly impacted by the downturn. However, it benefited very strongly from China stabilization, with stockpiling plus large order activity easing the magnitude of order decline into mid-single-digit territory. Order growth was strong in Industrial Automation, led by marine and ports and process industry, despite COVID-19 challenges. I will now provide a closer look at the first quarter performance of each of our businesses, starting with Electrification on Slide 9. Electrification's orders were 2% lower against a tough comparable, especially for large orders. The distribution utilities and infrastructure segments were resilient, with strong project wins focused on AMEA region. E-mobility performed well. General industrial activity was subdued, as well as renewables. Buildings slowed with a significant impact in China due to COVID-19, partly offset by strong performance in Europe and the United States. Revenues were 7% lower, reflecting a tough comparison period, production outages in China, and constrained project activities in distribution solutions. The order backlog ended the quarter up 9% year-on-year. Electrification's operational EBITA margin contracted 100 basis points year-on-year. A notable improvement in the margins of installation products was outweighed by incremental solar losses and lower volumes. We anticipate a tough quarter ahead, with revenues reflecting clearly bigger impacts on short-cycle business from COVID-19 lockdowns, particularly in the United States. Margins are also expected to move materially lower sequentially with a sharp falloff in demand overriding cost savings and diminishing our ability to improve performance in both GEIS and installation products. Next, on Slide 10, we have Industrial Automation or IA. IA's orders grew 8%, driven by large orders. Project activities in process industries, such as pulp and paper and mining, as well as imports, were strong. The conventional power generation market remained weak, while oil and gas, particularly shale, slowed. Revenues were 1% lower as COVID-19's impact on book-and-bill activities outweighted (sic) [ outweighed ] support from the order backlog going into the quarter. The order backlog rose 6%. The operational EBITA margin of 9.7% was 380 basis points lower. Margins were impacted by unfavorable business mix, project execution delays and mobility constraints on service activities. While oil prices are not expected to recover significantly anytime soon, the pipeline of opportunities in the oil and gas industry has moved considerably lower. Power generation and marine and ports opportunities also looks subdued. In addition, COVID-19 is expected to continue to hurt service activities and systems installations across all business areas. Industrial Automation's revenues and margins are expected to show material decline sequentially. Let's turn to Motion on Slide 11, which delivered a solid, quarter given the deteriorating backdrop. Total orders rose 8%, led by large orders, especially for rail in Europe and water and wastewater applications in AMEA. The broad-based short-cycle downturn was also mitigated by orders generated by new OEM customers, where the business has successfully driven improved market share and a strong rebound in China, driven in part by stockpiling. Revenues were 4% lower, reflecting a tough comparison base; lower book-and-bill, mainly in China; and select delivery constraints, which increased when India implemented quarantine measures. The order backlog increased strongly by 15%. Operational EBITA margin of 15.3% was 110 basis points lower year-on-year, hurt by lower volumes and by incremental freight costs, despite aggressive and supportive cost mitigation efforts. In Q2, we expect Motion business to more fully reflect the impact of COVID-19, with revenues moving into double-digit decline and margins expected to decline sequentially. On Slide 12, we turn to Robotics & Discrete Automation business or RA. Orders for Q1 were 14% lower. The Robotics business was challenged by the sharp decline in auto and Tier 1 activities, including a standstill at several car factories worldwide and significantly lower large orders. Orders benefited from a strong performance in machine automation, driven by order conversion from prior design wins, as well as stockpiling of components. Revenues declined 19% with system and service activities, particularly in China, severely curtailed by COVID-19. The order backlog was 2% lower year-on-year. Margins were impacted by lower volumes, partly mitigated by cost-saving measures. The operational EBITA margin of 8.8% was 240 basis points lower than the prior period. Looking ahead to Q2, we expect further downside from the automotive and automotive-related sectors to impact our Robotics business. Additionally, the machine automation business, which performed well in Q1, is expected to decline. In all, we expect the top line to decline by more than 30% and the margins to be severely challenged in the second quarter. We currently do not expect the picture to improve much before the fourth quarter. That said, this highly uncertain macro environment has even more strongly highlighted the emerging long-term need for Robotics & Discrete Automation Solutions. ABB will continue to invest in R&D and will be well positioned to capture this demand once the environment starts to normalize. We will turn now to Slide 13, which provides some perspective on ABB's medium-term financial resilience. Given the uncertainties prevailing around COVID-19, ABB is not currently providing guidance for full year 2020. We have provided the usual framework for certain line items impacting the group in the appendix. In particular, for the full year 2020 period, we have lowered our Corporate and Other cost guidance to approximately $550 million from $600 million previously, and reduced net financial expense guidance to around $120 million from $150 million previously. We have also revised our estimate of tax leakage from the sale of Power Grids to $200 million to $300 million in 2020 from $400 million to $500 million. Nonetheless, as noted for each of our businesses, we expect our results to be significantly impacted in the second quarter by COVID-19. Looking forward, while the present conditions are exceptionally challenging, ABB is in a good position to manage them and to emerge stronger when the global economy recovers. Our businesses serve more than 30 different end markets. We have maintained a good regional balance, and our regional production capacity is well matched with regional demand around the globe. We have continued to transform the group under the ABB-OS operating model, which improves our ability to respond to the global downturn. Our finances are sound, and ABB has a strong balance sheet. The sale of Power Grids is targeted to close end of Q2 2020 as planned, and we have access to an undrawn revolving credit facility of $2 billion. As we illustrate on the chart on the right-hand side, ABB's cash flow has proved less volatile than operational EBITA during previous challenging periods. While we understand that this shock is different, we also expect to display some of the same resilience, even in the current circumstances. In all, we are confident that our liquidity needs will be well covered. Our Board's confidence in the company is reflected in the 2019 dividend, which was approved by 99.8% of shareholders at our 2020 AGM. And with that, let me pass back to Björn now to give you the bigger picture.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Timo. Moving to Slide 14. I would like to highlight that while we are very focused on mitigating the impact of COVID-19, our daily business activities continue wherever we can to serve our customers. We also continue to invest in R&D for the long term. While I'm not going to describe this slide in details, it provides some color on some of the business successes during the quarter. The examples illustrates the resilience of some of our end markets and how technological innovations also contribute to sustainability, which I strongly believe remains our long-term structural growth driver, despite the near-term disruptions. Summarizing on Slide 15, I want to underline that no one knows precisely when the current crisis will come to a definite conclusion. Hence, we must continue to focus on our immediate priorities. In the second quarter, we expect ABB's operations to be significantly challenged by the sharp drop in demand due to the lockdown in many parts of the world. Nevertheless, we will accelerate our efforts to manage our cost and safeguard liquidity. The decentralization of the group is continuing as planned. And we look to complete the divestment of the Power Grids with the closing at the end of Q2 2020. ABB remains committed to a share buyback program using net cash proceeds from the transaction. The company is planning to execute this in an efficient and responsible way, taking account of the present circumstances. The short-term outlook for our end markets is much weaker than we would like. Most markets will see the impact of the COVID-19 and some also from the fall of the oil prices. But where there are bright spots, we will continue to make the most of them, notably, in markets like logistics and warehouse automation, data centers, food and beverage, distribution utilities and railways. We will continue to respond to the current environment to mitigate the impact of our customers, shareholders and employees. At the same time, we are also thinking beyond the COVID-19 and about what sort of company we want to be long term. I am looking forward to providing you some early thoughts on June 10, when I'm scheduled to, via a webcast, share some of my first perspective on ABB and our way forward. Thank you for your attention. We are now ready to open the lines and look forward to answering your questions.

[Jessica Mitchell, Head of Investor Relations]

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

[Operator]

[Operator Instructions] The first question comes from the line of Guillermo Peigneux from UBS.

[Guillermo Peigneux-Lojo]

Guillermo Peigneux from UBS. I have 2 questions, first regarding the PG transaction proceeds on the buyback. Can I ask Björn, is the buyback the best use, given the uncertainties and some of investments needed to modernize the ABB Technology platforms? Would that money be best used incrementally to transform ABB into its future vision? Or are you happy to carry the whole mandate on the whole buyback as we speak? The second question is also related to the divergent trends that you mentioned during the automation presentation, both in the IA and the Robotics & Discrete Automation. Would you say that some of these industries should remain more like last year going into the future, versus Robotics & Discrete Automation, which should be actually benefiting from structural growth trends? As the growth outlook is so divergent, would you say that the same of ABB in the future could also be diverging from this, let's say, less growth in the end markets than IA?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. Thank you for your question. Let's start with the PG transformation. And first, I'd like to say that, yes, we are very happy that things are moving the right way and we are expecting to close the deal by the end of the quarter. I think that is the first part. We are also committed to the buyback program that we have said. But I think it's also always very important that we do that in a good way, taking a lot of stakeholders in consideration. But we are fully committed to that part. And we have no plans on making any large acquisitions either going forward. It's getting the margins up in the group that is going to be the focus going forward. I'll let Timo give you a little bit a deeper part of the buyback program and also on the PG transformation part of that. Could you add on that a little bit, Timo?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes, sure. Thanks, Björn, and thanks, Guillermo, for the questions. So as we discussed, we expect the PG transaction to close as planned. And I just want to remind everybody that the planned buyback relates to a transaction, which was already announced in December 2018, and it cannot really as such be compared to some running buybacks with some other companies have made decisions on. So just really wanted to highlight that. And of course, going forward, we have done a lot of cash simulations, putting this unique COVID-19 situation aside, and we would, of course, expect to continue to generate cash flow from our operating activities for future purposes as well. So maybe with that, I'll hand over to Björn to the next question.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Timo. I hope that gives an answer to your question. Yes, looking at the portfolio management and I mean you're referring here to the Robotics & Discrete Automation. When I look at ABB, and I will talk much more about that in the future, I think the group is very well positioned when you look at these global trends, where Robots & Discrete Automation is actually a part of that. Yes, we -- from my perspective, when I look at ABB, I have difficult -- when you talk, we talk about 4 different businesses. But when I go actually a little bit deeper into it, I actually see 17 business operation or business lines. That's actually where the business is conducted and that's where we're looking at the future. I think in every strategy, that companies are doing portfolio management is an important part of that. So yes, we're going to challenge all our businesses. When I say businesses, these are the 17 business lines that we have in the group to make sure that we can generate value with these businesses going forward. We will also see that they are core to ABB and also that they are delivering enough profitability also to qualify to be part of this group. But we'll come back to that, and we'll talk a lot about that during the coming years. At the moment, yes, it's short-term challenges for the Robotics side, which is, of course, very much related to the automotive industry that is more or less in shutdown. But there are segments within robotics, and I know you guys have had the opportunity to dig into our businesses a little bit more, like logistics. It's a lot of handling of packages all around the world where there are good solutions where we think we can contribute with the robot solution to make the world more efficient on this part. So yes. We have a strong belief in the robotics for the future and I hope you guys do, too.

[Operator]

The next question comes from the line of Virgo Alexander from Bank of America.

[Alexander Stuart Virgo, Director]

Welcome to the seat, Björn, and I trust everybody is well and healthy. I wondered if you could give us some idea of tough trading in April we've heard from a number of other industrial companies suggesting high double digits or 25%, 30 percent-or-so year-on-year decline might be the norm, if I might call it that, and obviously, you've mentioned that explicitly yourself in terms of RA. I just wondered if you can give us some idea of how things have started in Q2 just to help us frame that significant or material decline Q-on-Q. And then as a follow-up, in the face of, obviously, quite a weak top line already, you've had a very strong performance on corporate and costs. And I wondered if you could just talk a little bit about how -- what you can do around defending those margins? And in terms of severe sequential decline, does that mean mid-single digit at the group level? I'm just trying to get a feel for the magnitude of that decline Q-on-Q.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Alex. Yes, starting up, we don't really give more flavor on the second quarter, but I think we're giving in our report a pretty part. And I think we are pretty much in line with that. What's positive, I think, is that we saw good recovery in China during March, which has continued into April. I think that is very well positive. Otherwise, there has been a big shutdown in the parts of the world. Many of the markets, like India and U.S. and Germany and Southern Europe, have shut down and that gives challenging trading conditions. Things are hopefully are going to open up now slowly from the business-wise and I think that probably will help us. On the other hand, I can say that I'm quite amazed how the ABB factories -- I mean we have more than 200 factories who have been operating during the quarter efficiently. Even in the middle of Italy, in Bergamo, we had 3 factories that have been up and running during this period. It shows that we have been managing to keep people safe within our factories, even in these challenging market. But we'll come back to the Q2 in a couple of months, and we'll talk a little bit more about that. I hope you might be listening in also the 10th of June and we'll talk a little bit more about the strategy side here. Then on the corporate cost side, I'm a very strong believer on the decentralized structure. And as you know, the group started already a year ago to move in this direction, where we have cut down on the central costs, eliminating the country organizations and moved the responsibility out to the businesses. This is very much in line with my viewpoint of running a company. And we have also seen that the businesses are managing their demand in the right way, and we do expect that they will do that going forward. So far, you've seen that demand has kept up, as you saw during the first Q2. So we've been having a tough part in some factories to be able to keep the personnel in the company, because of people being home sick and they're worried about the virus, but we've been managing that. Going forward, it is a tougher working. It's a much tougher environment in Q2 and that's what we need to deal with. And Timo can give you a little bit more details on that cost side also, what we do centrally.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Yes. Thanks, Alex. On the -- maybe on the Q2 outlook still, just to remind that we said that we expect material sequential decline in all businesses and we mentioned the 30% for RA. So if you just look at our numbers, probably one would come into conclusion that in the other businesses, it's sort of double digit, but less than 30% and maybe a bit less in Motion, something like this. But as I said, double-digit in all businesses would be in line with that. Then when we look at the cost side, so the ABB-OS has given us a good platform to drive cost down. And actually, we are quite pleased with the cost performance and we want to follow the ABB-OS cost development separately from the other cost items, which we can now drive so that we don't mix the two. So we are making good progress towards our $500 million overall target in the ABB-OS cost. And if I give just some highlights for the quarter. So our SG&A was down on comparable basis, 5%; G&A, 8%; R&D, 7%, exactly as Björn said, because we have moved a lot of these costs to the businesses and they are then optimizing the cost. And also then when we look at some other cost items, we, of course, follow this line by line. We are clearly down in travel and entertainment, actually, of course, a lot down in March. We follow separately professional services, where we focus on making the PG transaction happen, but otherwise, we are, of course, very tight. On PAX, we are taking action. Our PAX is also clearly down year-on-year, and where applicable, we use shorter workweek. We have also done voluntary reductions, as you know. We take action in temporary labor. And we are deferring nonessential CapEx as well and we are renegotiating also supplier contracts in the right way where applicable. So yes, we are taking a lot of action on that side as well. Now if we have a big double-digit drop in revenue, it's clear we cannot move fixed costs down as quickly as that would happen. So we would have further negative leverage. I mean, that's that fact.

[Operator]

The next question comes from the line of Martin Wilkie from Citi Research.

[Martin Wilkie, Director]

It's Martin from Citi. The first question was on the large order backdrop. You mentioned particularly, in IA, that you were supported a bit by large orders. Just to get a sense of what tendering has done there. I mean has the tender pipeline effectively just seized up and dried up, just to get some sort of sense as to how quotation activity, tender activity and so forth has progressed inside large orders? And the second question would just come back on costs where you mentioned, obviously, that ABB started on its decentralization effectively a year or so ago. Just if you could talk about perhaps some of the new cost initiatives that might have been brought in over the last few weeks or a month or so, just to give a sense as to the new programs that have kicked in as part of the reaction to the COVID crisis?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Martin. On the large order side, yes, you've seen that's been up during the quarter. We can see that both in the Motion as well as in Industrial Automation, we've seen 8% growth. We've seen that down 2% in Electrification and then a little bit more in the Robot side, as you all know. On the large orders, I think where we can see the good orders actually coming up in the Industrial Automation coming from the process industry like mining, imports has been quite good, but also in pulp and paper. So I think that's been keeping up. And there is, of course, a long tendering process in this. And we do expect that this tender will be challenged, of course, going forward but depending on how the markets are developing. I think the important thing is that you've seen the short-term orders have been down a couple of percent, I think, 3%, which means that, yes, it is a little bit more challenging in these everyday businesses. But we'll see how that will be moving forward. If we take -- on the cost side, maybe you can add on the -- a little something on the cost side there.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Thanks, Martin. I think I pretty much covered that. So again, as I said, we want to keep the ABB-OS cost reduction, which is a long-term program separate from reacting to the short-term demand challenges. And we are reacting on the short-term side in ways as described, i.e., we are looking at all cost categories, travel and entertainment, professional services, PAX on shorter work week and so forth. So we are really separating the 2 items. And we, of course, have to look at these businesses in a way that if we would expect a recovery shorter term, we can also quickly react to that recovery.

[Operator]

The next question comes from the line of Andreas Willi from JP Morgan.

[Andreas P. Willi, Head of the European Capital Goods]

Yes. I will leave my longer-term questions to the June 10 event and focus on 2 follow-ups on what was already discussed earlier -- 1 follow-up on what was discussed earlier. You show a short-term market outlook on Page 15 of the slide pack. Is that kind of how you see specifically Q2 in terms of the various end markets? And some of the markets here where you only have a 0 to 5% decline, is that kind of what you expect from these markets in Q2, despite that due to lockdowns and so on, pretty much everything is affected by a similar way in some countries? And the second question on -- you mentioned stocking or increase in inventory by customers during Q1. Can you maybe talk a bit what you've seen since Q1? Have you seen more distributors moving towards destocking to adjust to the lower expected revenue environment? Or should we expect less destocking in the channels this time around given that everybody is a bit cautious in terms of securing supplies? And what do you expect from the inventory side after Q1 seems to have had a positive benefit from that?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Andreas. Thank you for those questions, yes. I think we've given the flavor on the short-term outlook and I think Timo was pretty clear on that in the question is that you will probably see a double-digit drop in that part. So yes, it varies, of course, between the different businesses. We are in so many segments and not all the segments are being that challenged, so there are some positive and some negative, but it is, of course, a much tougher trading conditions going forward. Then a positive, on the other hand, I said that China had shown a strong start into Q2 and that we are happy on. I think we'll leave a little bit the speculations more into Q2, and we'll come back to that at a later stage. On the stocking side, yes, I think we mentioned on the stocking side a little bit on the discrete automation side that we thought there were some increases on the inventory. That probably might be some of our partners that also wanted to secure their businesses. It's difficult to know exactly in the details what that has coming. We have also seen a small buildup in inventory within the group, but that is more related to these difficult trading conditions and the logistic issues that you are getting to move goods and people all around the world as Timo said. But I don't think we see the inventory buildup among all our partners as the biggest issue. I think it's more the demand on the other side, which -- the end-customer demand that is going to be challenged during the second quarter. So I think I'd stop there if you don't want to add anything to that, Timo?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes, just a super quick add on the outlook slide. We are not only talking about Q2, we are thinking about that a bit more as a sort of general short-term outlook.

[Operator]

The next question comes from the line of Simon Toennessen from Jefferies.

[Simon Toennessen, Equity Analyst]

My first question is on Industrial Automation. As we enter another environment with very low oil prices and certainly pressure on some automation -- process automation CapEx such as maybe the cruise ship segment, and I appreciate you both weren't at ABB during the 2015-'16 oil and gas crisis, but when you speak to Dr. Terwiesch and his team, where does ABB draw the parallels and differences to 2015-'16? I mean, the last downturn in this area, it took you more than 2 years to see Industrial Automation back in revenue growth. And it looks like you entered this downturn with a worse book-to-bill last year than you did, for example, in 2014. So a bit more color how you think about that sort of medium term? And the second question is on the margin. If I look at the presentation at the bridge, your volume impact suggests a 31% drop-through margin in Q1, which is lower than the 37% you had last year in 2019 overall. As this downturn gets worse, how should we think about drop-through margins also for Q2?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. Thank you, Simon. I think I'd start with the IA question then I will hand over the margin one to Timo. Yes, I don't know what Dr. Terwiesch said at that moment, but if we look at the oil price drop, I think this is an oil price, which is, of course, very much related to that shutdowns in everywhere. I think there is no consumption at the moment. So I don't know if this is in line with the previous drop prices in oil and I think the future will tell on that part. What is our exposure towards the oil and gas industry? It's about 12%. Yes, it's correct that IA is where you see most of this. But you've also seen in IA growth during the quarter, one of the 2 businesses that you've seen with 8% compared to that. It is, of course, not from the oil and gas industry you're seeing that growth. I think you're seeing challenges there, especially in the shale part in North America, which is traditionally a pretty good margin business for us. Where you've seen the growth has come on the other side, it's more the process industry, pulp and paper, harbors and the mining business, which is going strong. Yes, cruising market I think, Simon, neither you and I would go cruising in the next month. And we know that most of the cruising ships are parked at the moment, and we don't know when they will be up and running. Sure, this is an interesting industry because our Azipod business on the marine side, but we also have turbo compressors on many of these. So there is a lot of service in the business. How this will pick up, it's very difficult, but I think your conclusion there is going to be challenging on the cruising ship going forward. That's pretty much. I think I hand over the margin question to you, Timo. How do you think it will...

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. So Simon, thanks for the question. So on the drop-through margin question, I'll answer this in a little bit different way because in our numbers when we just calculate the gross margin in the reported numbers, we have a fairly big delta this quarter coming from the FX hedges and commodity hedges. When I look at the operational gross margin drop, it is actually 30 basis points. So it's holding quite well, I would say, and we are taking a lot of action there to drive the gross margin. We have, as we have said, negative mix in IA, which is impacting. But overall, the cost actions are coming through. Now of course, the visibility is poor and it's very difficult to say how will that work through going into Q2. But overall, we try to do it so that we plan on the conservative and we plan the cost for the conservative as well, and then we see how it plays out.

[Operator]

The next question comes from the line of Wasi Rizvi from RBC Capital Markets.

[Jessica Mitchell, Head of Investor Relations]

Are you there, Wasi?

[Wasi Rizvi, Analyst]

Guys, can you hear me now?

[Jessica Mitchell, Head of Investor Relations]

Yes, we can. Thanks.

[Wasi Rizvi, Analyst]

Just a couple from me. In terms of the good recovery in China, can you talk us through how that's looking across different end markets? And then give us your view whether you think that pattern would be replicated in the rest of the world when we come out of lockdown or whether there'd be some variance? And then on the decentralized model, this is probably an earlier test of the model than you would have hoped. So I expect you've got business units that are making decisions they're not used to making under a time of quite a lot of stress. How are you managing that? You have to give them extra support? Are you confident that you've got all the skills and abilities in each of the business units that they can adapt to this change at quite a difficult time. Yes, just basically these.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Wasi, for the questions. Just in China, first, I think, yes, it's correct that we saw -- I mean, the shutdown in China in February was pretty brutal to us. But the opening up came and March came out better than we expected, and we are very happy for that. And it has actually moved quite well also with growth in to April. I think where you don't see that is the automotive industry and the robotics. This area is a more challenging side, while you see on the other segments a good recovery, not least in Electrification. Yes. I love to talk about the decentralized model and I'm glad that Timo and the team took decisions much earlier to move in this direction. So we managed, of course, to move a lot of cost and responsibility already out in our 4 businesses and we are now pushing it even further down. And when I talk about ABB, now I talk actually about 17 business lines under the 4 businesses, and that's actually where I'm concentrated because that's where all the business is conducted. So from my perspective, if we let these businesses run and be successful out there and we minimize central disturbance and country-wide disturbance, I think we'll see successful businesses. And I think they're already now showing that they are adapting to the tough situation. And it varies a lot between the businesses, which I think proves the decentralized model. But if you come back in 10th of June, we'll talk much more about that and give you a little bit more flavor.

[Timo J. Ihamuotila, Executive VP & CFO]

Can I make one, just a comment on the release. So we have changed our release slightly and in the Note 16, you can now also follow China and U.S. by business. So that's new disclosure, and we thought that it makes sense in this kind of situation. So I just wanted to highlight that.

[Operator]

Next question comes from the line of Shane McKenna from Barclays.

[Shane McKenna, Research Analyst]

It's Shane from Barclays here. Just checking if you can hear me.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes.

[Shane McKenna, Research Analyst]

I'm just wondering if you could quantify the margin drag from solar within Electrification in the quarter? And also, as a quick follow-up, you mentioned, obviously, strong performance in insulation products. But if you can provide us an update on GEIS integration and what's driving that reduction in acquisition and integration costs. And then I will sneak one further question in just on data center. I mean, given the positive commentary we're hearing elsewhere, I'm surprised it sits within that negative -- 0 to negative 5% bucket. Is that in terms of comps because I know that you had some difficult comps in Q1 in terms of data center. So as we look forward, is it really comps or are you seeing lower levels of inquiry in terms of the pipeline for that end market? I'll leave it there.

[Björn Klas Otto Rosengren, Chief Executive Officer]

I mean, okay, why don't you take on the GEIS first, Timo.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. So maybe I'll start with the solar drag. So it was slightly bigger than the 50 basis points this time. But overall, it's good to use that about 50 basis points when you now look at the margin improvement, as we have said earlier, but the impact for Q1 was slightly bigger. Then on GEIS, we are making very good progress. And again, it was very good that we had a very clear and well-articulated and in-execution program. So we have said that we expect to close 28 factories. We have announced 23 out of these and we have closed 10, and we are making good progress on integration. Actually, we are ahead of plan there. And when it comes to the data center, I mean, we are really using market data on that estimate. So it is not taking some specific ABB into account. That's our expectation at the moment on the market, because that slide deals with external market data. Of course, we are happy if it comes better because we have to...

[Björn Klas Otto Rosengren, Chief Executive Officer]

But data center has been quite -- we have had good success during the quarter also.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. That is exactly correct. So we need to separate the market slide from then how we are doing. So we are trying to use external data as much as possible for the market slide. But exactly as you say, Björn, we have had some good success in that market.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. And we do expect that, that will continue.

[Operator]

The next question comes from the line of Ben Uglow from Morgan Stanley.

[Benedict Ernest Uglow]

A couple. I think quite a lot of this was already answered. But just, Timo, can you clarify around the acceleration on the OS simplification cost savings, I think that was mentioned in the opening remarks, but you're making a kind of clear distinction between that program and temporary measures. What specifically is being done around the OS simplification program? And is there flexibility to have more than the targeted $250 million of cost savings this year? So that was really question number one. Question number two is can we just get a bit more granularity about this mix impact within Industrial Automation? How do we break down the 4 percentage points, please.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Can do that?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. So why don't I start with the cost question and then hand over to Björn. So first of all, I'll give you an example on the OS cost piece. So we have now a very, very unusual situation regarding travel. And of course, we would like to have our service guys to travel more to execute and the project guys to travel more to execute the projects. So that kind of drop in cost we will not count into the OS savings. But then if we have a plan to, for example, reduce the travel cost overall by a certain percentage and it's continuous cost reduction, then that would be part of the OS program. So again, as I said, we are making good progress and I expect that we will meet the targets, which we have said on the OS cost -- OS program. And then on top of that, we are taking a lot of other actions as well, which was earlier described in the call.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Timo. I'll talk a little bit about Industrial Automation. I think it's an important part. It is, of course, important to understand the Industrial Automation, you need to go a little bit more in details and you know that we've been becoming a little bit more transparent where we have given the opportunity for Electrification, but also the Robot & Discrete Automation to give an in-depth to all of you. We are planning to do this also with Industrial Automation. It gives you a little bit more spice, how it is. But I can say from -- number one, we are not fully happy with the operating performance of Industrial Automation. This varies between the different businesses within. I always talk about my 17, but looking into it. But there is a clear mix area on this part, where certain areas where we have better margins part has gone down a little bit, and there are some executed orders with less margin in. That is also related to some larger product execution delays in doing that, but also the difficulties of doing services in certain areas, I would relate it to that. But I think to understand the IA, we need to dig that a little bit further and we can promise you that we will give you that opportunity in the same way. Jessica is looking now with that eye. But we have promised that as we have done with other businesses to give you a little bit more clarification. I hope that's okay.

[Operator]

The next comes from the line of Daniela Costa from Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

Okay. Two things from my side. First, I wanted to check if you're using any of the -- or taking advantage of any of the furlough programs from any government, if you could give us sort of an overview around that. And then a question on cash and the progression going forward, you made a helpful comment about the situation on inventories. Would you expect, like in prior downturns, an unwinding of inventories as we go over the next few quarters? I know one of Timo's focus over the last few years has been normalizing the cash over the quarters. But can you give us a little bit of insight about how should we still think about it under this current environment?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thanks, Daniela. I have talked about -- a little bit about this short-term shutdown that we have and then I give over to Timo to take the cash part. But look, I mean, we're a global company. When I look at ABB, I see my 17 business lines operating all over the world and they are responsible for, of course, making sure that their cost is in line with the demand. So there are -- I'm sure that there are some of them using these short-term shortages that are being offered in some of the markets. I think we know that in Switzerland, for instance, that is actually taking place. But it could be some other places also. I think that's up to the businesses and to do and why we believe that this is maybe not a long-term down, we will try to use that. If we believe that big, big changes in the long term, of course, we might have to take other kind of actions. But yes, we will take use of that. And then, Timo, on the cash side?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Yes. So thanks, Daniela. As you see, we were down about $300 million in cash flow from operating activities and the biggest part of this is the change in the timing of the incentive payment. And then we also have Power Grids-related items, both tax outflows from the costs which we booked Q4, as well as then separation-related items. So when you put those aside, our, I'd call it, operational working capital actually improved about $175 million and we were ahead of cash when you sort of compare like-for-like to next year. And exactly to highlight the point what you made, we actually added that one slide into the deck, which shows how our operating cash flow has moved in relation to operational EBITA. And we have historically had less volatility in operating cash flow than in operational EBITA. And of course, you can't use history as a predictor. This is a new kind of crisis, but we would expect that some of those dynamics would present themselves now as well.

[Operator]

The next question comes from the line of Andre Kukhnin from Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

It's Andre from Crédit Suisse. I have a midterm question on the end markets and thank you for your slides with a short-term outlook and some of the indications. Clearly, nobody knows, so really we just appreciate your framework. If we think about where will demand reattach post-COVID, whether that's sometime in the second half of this year or in 2021, I think you've outlined some resilient end markets, like distribution utilities, F&B, pharma, rail, data centers, warehouse automation; and some challenged ones as well, like conventional power gen, cruise, oil and gas. I wonder where you have buildings end markets, such as mining and metals, blending in that framework.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Andre. Talk a little bit about this midterm. It is, of course, difficult to predict the future. But I think from my perspective, I must say, that I had an opportunity to look into ABB during the last 3, 4 months in details. And I think ABB is well positioned for a lot of these megatrends that are taking place that I think maybe not short term you can get big demand from, but we are definitely moving in this part. I think on the Electrification side, it's is a very exciting business. Motion is very much related to that with drives and electrical motors part, which is actually pretty much related to the Electrification. Robot -- I mean, this is pretty clear. Even though automotive have short-term challenges, I think the whole world is going towards a more robot-sized parts. And then comes with the Industrial Automation. Yes, there's a lot of segments where we are operating there. There are probably some segments could be more challenging, while other segments could be probably more beneficial going forward. And I'll be happy to talk more about that when we go forward. But from my perspective and I really say that because I believe that there are few companies so well positioned for these megatrends that are taking place over there, and I think that's our job to make sure that we can benefit from those.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

And can I just ask if -- from what you see so far already from your experience of COVID, whether that's in China or places in Europe, can you see anything that you're already confident to say that will be different on the back of COVID, whether in terms of how you go about doing your business or what you see from the customers?

[Björn Klas Otto Rosengren, Chief Executive Officer]

I mean, I think that's something we will learn from. But I think it's a quite clear that -- which have surprised me most that we have managed to run the business from home, if you put it that way. People have been sitting home and doing -- making sure that everything is done, everything from the reporting of this quarter, with people both in shared service centers in India, which is totally locked down. At the same time, we managed to get the numbers together. People have been doing this. This is quite amazing. So yes, I do believe that there will probably be things that I think doing business, you need to meet face-to-face, but I think we can solve probably many things in a more cost-efficient way going forward. And I think this is something that you learn about. The whole digitalization part is something that is accelerating. We can see that in all our businesses, helping our customer to connect. Just this -- on the robotic station today, we've been offering our customers to connect to this remote monitoring of the robot stations and I think we have up 400% in this area. So yes, definitely, this is the direction that we're heading so. So the one who lives will see.

[Operator]

The last question for today comes from the line of Jonathan Mounsey from Exane BNP Paribas.

[Jonathan R. Mounsey, Analyst of Capital Goods]

Just looking at restructuring. Obviously, no big incremental plans regarding particular businesses today. And I guess maybe it's a little early in, I hope, and maybe we'll see something in June. But if I think about the impact of COVID-19 on some of your end markets, 2 kind of stand out as the outlook may now look very different to what it did before COVID. So obviously, the marine outlook already seeing it down short term. But longer term, if the orders start to get consumed, are we likely to see new orders replace them? And if not, are you already starting to think about the cost base long-term there? And on oil and gas, obviously, as well, I think COVID, there's a short-term impact to the oil price, but probably this accelerates the move to a more green economy. How are you thinking there as well? Are we going to have to see a repositioning of the business or downsizing or something after this is all played out? Are you starting to think strategically? Do we have to wait for June? Are we likely to hear about incremental restructuring in June?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. Short of the -- on the restructuring side, I think we can see it from 2 different perspectives. One that Timo and the team started with the OS going back and that is moving the structure from these metrics towards more decentralized business. That's been going on and I think they're doing a good job, and we're trying to accelerate that as much as possible to get the final structure. We'll come back to that in June, when we talk about that, and I think that always is a very important part. Then I think the longer term then towards a more green economy, yes, you're probably right that it's the part. I don't think that change will do just because of the COVID. That direction is put. And that's what I said before. I think, here, ABB is well positioned. I think the biggest impact ABB can do is actually with our products, helping our customers to become more sustainable.

[Jessica Mitchell, Head of Investor Relations]

Great. So well, thank you to you all. If there's anybody's questions not been answered, IR is available at all times and we are very happy to follow up with you. Thank you to Timo and especially to Björn. I think we can now say he's firmly in the chair. So welcome, again, from all of us. And thank you all. We look forward to talking to you in the coming weeks, and again, on the 10th of June. Thank you.

[Operator]

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