Abb Ltd

SIX:ABBN

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Q2 2020 results analysts conference call. I am Alessandro, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. 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 welcome to ABB's Second Quarter 2020 Results Conference Call and Webcast. The press release and financial information documents were published this morning at 7:00 a.m. and can be found on our website, along with this results rotation and further information related to the implementation of our buyback program. With me today to present the results and answer your questions are ABB's CEO, Björn Rosengren; and our CFO, Timo Ihamuotila. 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 harbor notices and our use of non-GAAP measures on Slide 2 of the ABB presentation. This conference call would 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 Björn.

[Björn Klas Otto Rosengren, Chief Executive Officer]

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 well, 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 4 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 divestment 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 4, 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 (sic) [ conserve ] cash. We have implemented wide-ranging measures, including: the elimination of discretionary spendings, including travel; modifications in staffing and pay; cutting consultancy and other external expenses; and the postponement of noncritical 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 spendings. 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 time line for these savings. Now let's move to Slide 5. The divestment of 80.1% of Power Grids to Hitachi on July 1 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 USD 11 billion for 100% of Power Grids. ABB will initially hold a 19.9% equity stake in the joint venture, which is now operating as Hitachi ABB Power Grids. ABB has nominated 2 directors to the Board, and we have a long-term supply agreement in place with the JV. Finally, ABB has an option to sell its remaining stake to Hitachi 3 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'll do this with a number of well-defined, fully accountable divisions, which are organized under our 4 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 quarterly results in more details. Thank you.

[Timo J. Ihamuotila, Executive VP & CFO]

Thank you, Björn, 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 EBITA 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 the fast delivery of the ABB-OS savings over the months ahead. Our Corporate and Other operational EBITA improved to $134 million cost, better than our run rate guidance for the quarter. However, we retained our previously reduced guidance of $550 million for the full year, which recognizes that noncore charges can, as has been the case in previous years, also create lumpiness in this line item. Operational EPS declined 35%. Basic EPS at $0.15 was up substantially, mainly due to the absence of the solar inverters 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 7, where ABB's regional and country order trends are shown in comparable terms. Order development 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 & Discrete Automation all heavily impacted. On a relative basis, Electrification performed a bit better, with orders down in the mid-teens on a year-on-year basis. In Europe, orders were 14% lower, with widely varying performance at the country level. Among ABB'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's results was 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 8. Electrification's 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 EBITA 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 Products business. The turnaround of GEIS and the Installation Products 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% and 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 innovate commissioning. The order backlog rose 3% year-on-year. The operational EBITA 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 EBITA margin of 17.7% rose 100 basis points year-on-year. Expansion was driven by strong cost-mitigation actions and favorable mix, which then offset lower volumes. Looking at the quarter ahead, Motion's 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 & 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 (sic) [ EBITA ] 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. RA'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 multiyear capital structure optimization program. As planned, ABB will return to shareholders the $7.6 billion 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.

[Björn Klas Otto Rosengren, Chief Executive Officer]

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 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 Markets 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.

[Jessica Mitchell, Head of Investor Relations]

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

[Operator]

[Operator Instructions] the first question comes from Shane McKenna from Barclays.

[Shane McKenna, Research Analyst]

Within EL, you cite resilient pricing and an improvement in GEIS and Installation Products, but how much of the margin was impacted by the exit of the solar business in this quarter? And just on the better pricing, is that a reflection of the rollout of new products at GEIS under the best of both? And if you can give us any commentary on inventory levels 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.

[Björn Klas Otto Rosengren, Chief Executive Officer]

I think Timo can answer this question.

[Timo J. Ihamuotila, Executive VP & CFO]

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 year. We have, inside EL, a slight negative mix. I just want to mention that because the EP IP, i.e. 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 net working capital is more coming from lower volume of business than actually the inventory days or the receivable days going down.

[Operator]

The next question comes from Andre Kukhnin from Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

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, 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 -- in 6 to 9 months' time, and hence, the question on the funnel. And the quick follow-up I had -- I have is on Motion mix that you flagged in the quarter. Was that all about China? Or was there something else into Products as well?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. Well, the one when we talking about Motion a little bit. Yes, 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. And 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 where I think you've seen this during this present quarter. It's correct that U.S. 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 are reflecting a little bit to Electrification and IA. Yes, first on the Electrification side, I think it's, in North America, very distributor-oriented. And it's correct that there has 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. I'm a big fan of service business, which normally is very resilient in the downturn. In this pandemic, we've seen actually the way around. I mean it's difficult to conduct service in 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.

[Jessica Mitchell, Head of Investor Relations]

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

[Martin Wilkie, Managing Director]

It's Martin from Citi. The first question is around customer spending in Robotics, you've currently outlined by end markets, where you're seeing some are better, some worse. But generally, there's a lot of talk about automation as a theme accelerating because of COVID, to de-risk lockdown, to de-risk sort of distancing. I mean have you -- 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?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Martin, for the question. Yes. I mean as we've seen, Robotics is where we see the biggest headwind. And that's, of course, driven a lot about -- from the automotive industry that had a total shutdown during the quarter. So of course, very, very tough environment. On the other hand, we see more connected robots than we've ever seen before. I think the connectivity has gone up over 400%, actually. So this is a drive that Robotics have done also to make it easy to access, but also to monitor the robots externally. Yes, we have -- I mean, there is a lot of discussions regarding digital solutions at the moment. And the way to remotely monitor and operate products. That's quite clear. We feel pretty comfortable that the trend will accelerate. And I think I read that also in some places that we are actually moving 10-year forward 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 -- I mean, it's only 3 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 answer...

[Jessica Mitchell, Head of Investor Relations]

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

[James Moore, Partner of Capital Goods Research]

I've got some questions on margins, if I could. You mentioned in the Electrification slide that GEIS and Thomas & Betts turnarounds are on track. I wondered if you could put a rough picture on their margin development in the first half compared to the total EL, which is sort of down 100 bps. I think from memory, on the Electrification Day, you talked about Thomas & Betts having a low double-digit margin and GEIS around 4%, and with a longer-term ambition to get both towards mid-teens. I just wondered when you say that they're progressing, are they actually up year-on-year? Or is it just that they're down less than the...

[Björn Klas Otto Rosengren, Chief Executive Officer]

James, I'd love to talk about Thomas & 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 & Betts 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've seen in the overall U.S., 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 targets that we have set for our divisions. I hope that gives you a little bit of a feeling. But yes, I think the management have the right focus and they're taking the right mitigating actions to improve the performance of this business where it should be. I didn't give you any numbers, but it's good numbers.

[James Moore, Partner of Capital Goods Research]

That's great. And then GEIS is a similar story?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes, 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 3 EL divisions, which we then focus on now improving the performance within. What we can say about GEIS is that the integration continues to be fully on track and we are slightly ahead of the cost synergy plans, which we set out when we announced the deal, i.e., about $120 million within 2.5 years and $200 million within 4.5 years. Also the consolidation of the factories is continuing as planned, and that we are having 10 closures by now, as we have said, out of 28 and look to do 8 more during this year.

[Björn Klas Otto Rosengren, Chief Executive Officer]

I think the work is going according to the 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, to get the much into the right level for the whole Electrification.

[Jessica Mitchell, Head of Investor Relations]

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

[Benedict Ernest Uglow]

Well, great. Morning, everyone. Thank you for taking the questions. A couple of questions. First of all, Björn, 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 sort of Swedish engineers 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 onwards. 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 $1 billion? How big a step-up might we be seeing in the second half?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. Shall I start talking a little bit about China and it's correct that during -- well, 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 Electrification is doing quite good in China. A 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. China is a big market for us, about 15% of 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. Is that 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.

[Benedict Ernest Uglow]

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

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes, I think it stayed quite good really. I think it's -- 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.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. 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 drive products. There, we had a bit of a pent-up demand situation and that's why we are saying that we would not expect similarly positive mix to continue to Q3. So in that area, we saw some of the similar development, which we 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 net working capital management situation when you measure it on, for example, days of sale 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.

[Jessica Mitchell, Head of Investor Relations]

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

[Alexander Stuart Virgo, Director]

I just wanted to pick up a little bit on your comment, Björn, 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?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. Thank you, Alex. Yes, I mean, we have continued -- I actually spent, during this quarter, quite an intensive 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 fine results. So I think we will -- 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 extraordinarily 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 to reach our target for the first 3 years. I mean that is the important. And then, of course, the execution of that, that's up to proof.

[Jessica Mitchell, Head of Investor Relations]

Thanks, Alex. Next up, Will Mackie from Kepler Cheuvreux. Are you there, Will?

[William Mackie, Head of Capital Goods Research]

Yes. My question -- my first question really direct -- is directed at understanding a little of the market behavior within oil and gas, marine and conventional generation, and also the machine building segment. So 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 & Discrete -- sorry, the machine automation segment within Robotics & 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 we -- that you saw in the first part of July after closing.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. Maybe I start a little bit -- to talk a little bit about our market. I mean you seem quite clear that when we look at our 4 business areas, you've seen excellent performance in Motion, good performance 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. So I think that is -- so that's probably been the most challenging during the quarter. On the Industrial Automation, where we normally come back, it saw different businesses. And let me talk a little bit about them here. One which I think sticks up, maybe from your perspective it looks a little bit soft in their 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 the downturn, service is the -- actually the resilient part of the business, where a business like turbo delivers excellent result also when you sell less of the products. This downturn is different. And when they -- I mean, 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, more or less all the power generation in these islands, which is very much a tourist island, is driven by our Turbo compressors sitting on these power plants. And there, there has been less activity when it comes to tourists and so which has certain effects. So yes, it has been 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 antipodes and our electrical propulsion systems. So that's on the service side. So when you look at these businesses in Industrial Automation, it is actually 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 market 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 pulp and the mining side that kept up. So let's say a little bit on mix. You asked also about measurement and analytics. I think that is also a little bit loss in margin from the oil and gas industry. We have certain products which drive 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, is necessary. I hope this gives you a little bit feeling of the situation within Industrial Automation, which I think is the one we need to dig more into going forward.

[Jessica Mitchell, Head of Investor Relations]

Okay, thank you very much, Will...

[Björn Klas Otto Rosengren, Chief Executive Officer]

Hang on. Now we have Timo also.

[Jessica Mitchell, Head of Investor Relations]

Timo also, sorry.

[Timo J. Ihamuotila, Executive VP & CFO]

The results of the Power Grids, cash question. Thanks, Will. I presume you are now referring to the impact after Q2 closing, and we're, of course, not now disclosing the whole Power Grids 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 net working capital. And I think that's in line with expectations because you can follow that the Power Grids cash development has not been, let's say, super good during the 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 pretax gain from the transaction going into Q3.

[Jessica Mitchell, Head of Investor Relations]

Great. Thanks, Timo, and thanks, Will. And we'll take our next question from Andreas Willi of JPMorgan.

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

I have a question to follow-up on the earlier discussion on the cost savings. 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 impact 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?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. Let me start-up, and we are 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 has 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 amount of traveling. There 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 ABB. 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 tried to explain here, like some of the energy markets, oil and gas, automotive and so on, that needs to be taken more actions. And 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 the COVID is not over yet, so we will have a lot of the short term also in the coming quarter.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. 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 million 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 deleverage more than $1, 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'll come back to that in Q3. And then finally, on the buyback, I mean, we are 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 the buyback, 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 billion to $7.8 billion.

[Jessica Mitchell, Head of Investor Relations]

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

[Gael de-Bray]

Yes, good morning, everyone. I've got 2 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 gaining 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?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. Maybe I can start with the Motion question and then Timo can take the Electrification side. Yes, 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 as I said, China is, of course, one important 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 right business, it is leading. I think there is no one who has more connected drives in the world that ABB has. And 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 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 divisions is actually doing quite good. Services, it's actually also performing quite good. I think they're taking a lot of these remote measures, doing service also online, supporting the company's 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.

[Timo J. Ihamuotila, Executive VP & CFO]

Sure. Sure. Thanks, Björn, and thanks, Gael. So I mean, going into the quarter on the 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. So we had 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 resilience in Germany in Electrification. Whereas then U.S., 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.

[Jessica Mitchell, Head of Investor Relations]

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

[Guillermo Peigneux-Lojo]

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 some more -- 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 pipeline. What do you see in the funnel? 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 -- looking into these kind of pipeline negotiations or final negotiations that you see?

[Timo J. Ihamuotila, Executive VP & CFO]

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 these costs 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 moved 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 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.

[Björn Klas Otto Rosengren, Chief Executive Officer]

And you had the question also on I think on the automotive industry, yes? 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 quarters. It's a question to say how many of these larger projects [ eventually ] that would 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 very important part. And that means when the market comes back, we should be there also.

[Jessica Mitchell, Head of Investor Relations]

Right. Thank you. Thanks, Guillermo. 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.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. Thanks very much.

[Timo J. Ihamuotila, Executive VP & CFO]

Thank you.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Bye-bye.

[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.