ABB Ltd

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

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

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