ABB Ltd

Greetings to you all and welcome to this conference call and webcast for ABB's fourth quarter and full year 2020 results. The press release and financial information documents were published this morning at 7 a.m. and can be found on our website along with the presentation we will go through here today. Following the presentation, we will open up for a Q&A session. With me today to present here are ABB CEO Björn Rosengren and CFO Timo Iamotila. Before we begin, I would like to draw your attention to the information regarding safe harbour notices on our use of non-gap measures on slide two 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. With that said, I will now hand over to Björn and Timo for the presentation. Please go ahead.

Thank you, Ansi, and welcome to everyone on the call. I have now been with ABB for almost exactly one year, and looking back, it has been a very eventful and exciting year. Let us go through some of the highlights on slide number three. It was a year when we transitioned ABB towards improved performance. We implemented the decentralized operating model, we call ABB way, making the division the highest operating level. They now have the cost ownership, they drive R&D for profitable growth, and they evolve their business portfolios. We launched our 2030 sustainability strategy and updated our financial network in November. And we delivered on the simplification program as achieved targeted net saving run rate of 500 million one year ahead of plan. I'm very confident that the actions taken in 2020 will leverage performance going forward. 2020 was also a year of the pandemic with dominated the market development. I am thankful for the speed and dedication of the ABB team on how mitigation actions were implemented. The agile response to COVID-19 challenges enabled our organization to prioritize health and safety while keeping operations running and undertaking strong cost mitigation efforts. After a year like 2020, I'm proud to see the progress we have made in our employee engagement survey. It shows that our employees have more clarity of their roles and responsibilities, as well as of our overall purpose of the company. We really saw the culture change gain momentum in 2020. Tim will talk you through the full year numbers a little bit later on. Turning to slide four, we shift focus to the fourth quarter. We saw a continued sequential improvement in customer activity from the low level noted during summer. In total, orders and revenues remained broadly stable year over year. The positive impact from mid single digit growth in the short cycle business was offset by subdued demand for services and headwinds in selected end markets such as oil and gas. We secured some larger system order wins for our world-leading ACIPOD propulsion technology. The machine automation division also closed out the period with an all-time high level of future design wins. This creates a good base to build from after the management change in machine automation division is completed. Revenues were stable, but we still managed to improve the operational EBITDA margin by 140 basic points, and the increase was led by stellar performance in electrification and motion. Synergies from GIS came in ahead of targets, $120 million run rate, and the integration is now approximately two-thirds completed. Further down the income statement, we had some adverse impact on the basic EPS. This related to pension and debt action taken during the quarter to strengthen our long-term financial position. But also to power grids, book gain adjustments reflecting ordinary closing related balance sheet adjustments. Operational EPS for continued operations improved by 20% to $0.26. Turning to slide five, showing ABB's regional order trends in comparable year-on-year terms. Asia, Middle East, and Africa grew strongly, while both Europe and America remained impacted by the COVID-19 pandemic. In Europe, orders were 12% lower year-on-year, and the business areas were challenged. In Germany, expansion in motion and electrification stands out, with total orders in each of these business areas up in double-digit terms. In America, orders were 6% lower, led by a decline of 12% in the U.S., Alongside demand impact from the COVID restrictions, orders intake was also impacted by downturn in oil and gas activities. A significant recovery was noted in Asia, Middle East and Africa. Orders rose 23%, with strong support from China improving by 21% in the quarter. We highlight excellent growth in RA in China with orders up close to 90% year-on-year. And with that, I hand over to Timo to cover the results in more detail. Please.

Thank you, Bjorn, and good morning, everyone. On slide six, I will begin with a review of what in our view was a solid end to a challenging year. On stable revenues, we increased operational EBITDA by 12% on constant currency and 16% in US dollar terms. Margins improved by 140 basis points. I'm pleased to see our prompt actions yielding results in margins in the fourth quarter. While other costs were down, R&D expenses in the fourth quarter in our four businesses increased by 3% year on year. Looking at below the line items, all divisions carefully reviewed their operations and this shows in restructuring related expenses at 220 million compared to 99 million the prior year period. Charge is mainly related to the future delivery of ABB OS savings, synergies from GIS's integration, and planned performance improvements in industrial automation. The planned actions undertaken to strengthen ABB's financial flexibility and de-risk the balance sheet also weighted on results, as did the adjustment to the PowerGrid's bookend. In total, basic EPS amounted to a negative 4 cents Operational EPS in continuing operations which adjusts for non-operational items and excludes impacts from the divestment of power grids was 26 cents up 20% year-on-year. Cash flow from operating activities in continuing operations was 1.2 billion after outflows totaling about 200 million from the Kusilä settlement and pension plan transfers. I will come back to the full year cash flow dynamics in a bit. Turning to the fourth quarter results for our business areas, I will begin with electrification on slide seven. Electrification orders were 2% lower, benefiting from strong demand in data centers and e-mobility and solid growth in renewables, rail and food and beverage. Oil and gas was challenged. Buildings improved sequentially, with residential activity outpacing non-residential. Revenues increased by 5%, supported by strong backlog execution and short cycle business. Electrification's operational EBIT-R margin improved 250 basis points to 15.6% in its target range for the second quarter in a row. The excellent result was driven by better volumes, supportive pricing and rigorous cost management, although the current low level of, for example, travel expenses is not expected to be sustainable in the long term. In addition, both GIS integration and the turnaround of installation products progressed well. During the quarter, we noted rising raw material prices. While it did not impact the Q4 result, it will be a headwind to manage during 2021. Looking ahead into the first quarter, we expect a low to mid single digit growth in revenues to support close to similar year-on-year improvement rate in operational margins as seen in the fourth quarter. Next on slide eight, we look at industrial automation or process automation as we call it from the beginning of this year. Orders increased by 9%, a strong result driven by large orders in the marine business, mainly for LNG specialty vessels. IA saw select activity in process industries such as mining and water and wastewater. Energy industries, particularly oil and conventional power generation, were challenged. The order backlog at quarter end was 5.8 billion, an increase of 650 million from the end of the third quarter. Revenues declined 11%, reflecting subdued levels of book and bill activities, with service being particularly weak in end markets such as cruise. The operational EBITDA margin of 6.8% was 530 basis points lower year on year. This includes the combined impact of 270 basis points from the settlement of the KUSILE project with ESCOM in South Africa and charges related to legacy power generation projects in India. Aside these items, profitability was hampered by lower volumes and unfavorable mix predominantly related to lower services activity. In response to the current low profitability level, IA has initiated structural actions to improve long-term performance. Looking into the first quarter, order growth is expected to decline significantly on the back of a higher comparable from the first quarter in 2020. Revenue is foreseen to decrease at a similar rate as noted in the fourth quarter, and the margin should remain largely stable on a sequential basis, excluding the impact from the project charges. On slide nine, we turn to motion, which again noted a solid delivery. Orders declined 5%, mainly reflecting a tough large-order comparison. Demand from rail and water and wastewater was healthy. Some end markets, particularly oil and gas, remained challenged. Revenues were flat, with development reflecting solid growth in short-cycle business and strong execution of the backlog. The operational EBITDA margin of 16.8% expanded 140 basis points year-on-year, benefiting from good cost mitigation, stable volumes, and supportive mix, even if rising price costs were a headwind. Looking at the quarter ahead, we recognize the record high comparable to be reflected in the expected negative order growth for Q1 2021. However, revenue growth should improve compared to Q4, while anticipated business mix is expected to lead to a slightly smaller margin improvement when compared to Q4. On slide 10, we turn to robotics and discrete automation. Orders were 5% lower. However, the result includes reversals of about 50 million, mainly in the order book for machine automation. These reversals adversely affected the business area's comparable growth rate by about 7%. Adjusting for this accounting impact, orders from machine automation were up clearly double-digit. In robotics, strong activity in 3C, improved activity in general industry, and select investments in EV manufacturing supported the order result. Demand from China was stellar. As Björn highlighted earlier, RA's orders were close to 90% higher year-on-year in China. The order development also reflects the more selective approach now being applied towards robotic systems business in the automotive industry, part of the division strategy to improve margins by shifting its mix toward higher value at smart systems and application sales. Revenues declined 3%, supported by positive developments in machine automation and good backlog execution. This was, however, more than offset by weaker development in robotics, particularly due to weak automotive segment and service business. The operational EBITDA margin declined to 7.3%, impacted by lower volumes, but also by unfavorable mix, primarily related to deliveries from the robotics order backlog to the automotive segment. Looking into the first quarter, we currently foresee orders to be slightly up on a sequential basis, while the growth rate should be adversely impacted by a more challenging comparable period. Revenue growth should return to positive territory, supporting a slight margin improvement year on year. Let's now turn to slide 11 and look a bit closer at the makeup of our operational EBITDA margins during the recent years. We can see that the amount of extraordinary items is steadily decreasing, both when we look at Q4 as well as full-year comparisons. We have eliminated the stranded cost after the closing of the Power Grids transaction. In non-core business, the exposure continues to decrease significantly, with clearly less than 10 projects still under execution. We are looking to exit the remainder of the non-core business as soon as practicable. However, as said at our capital markets day, we still have two main exposures and our exit from these exposures is partly reliant on legal proceedings, which could stretch beyond 2021. Regarding Kusile, we are not expecting further operational charges after the settlement done in Q4 with ESCOM in South Africa. That said, the settlement does not cover regulatory proceedings outside South Africa, which are currently not estimable. Moving to slide 12 and the cash flow from operating activities in continuing operations, which remained stable at 1.9 billion in 2020. This is in line with our guidance of resilient cash performance for the year. The 2020 result includes lower income from businesses in the wake of the pandemic and a favorable development of trade networking capital. It also includes a total of approximately 1 billion outflows incurred from ABB's transformation efforts. On a year-on-year basis, when excluding these impacts in both periods, cash flow from operating activities in continuing operations was significantly higher. Looking to 2021, we expect to deliver a meaningful uplift in cash flow from operating activities. On slide 13, let's look at the benefits from our capital structure optimization program now largely concluded. As discussed earlier, we are using the proceeds from the divestment of power grids on our ongoing buyback program. We purchased 109 million shares in the second half of 2020, just over 5% of our share capital. In addition, we continue to build an action start bid during the third quarter to deliver ABV in an efficient way and in a value maximizing way. In terms of debt and credit, in the fourth quarter, we opted to an early retirement of approximately 1.2 billion of bonds, which had high coupons. At the start of this year, we also were able to benefit from favorable market conditions by issuing a 0% long-duration bond of 800 million euros. Also in the fourth quarter, we transferred certain pension plan obligations to third-party insurers. In total, pension deals completed during the second half of the year cover an estimated 2.5 billion of pension obligations that were underfunded by an estimated 770 million. The deals have been enabled by about 360 million of cash contributions, as well as the transfer of approximately 1.8 billion of existing pension plan assets. As a consequence, we recorded non-operational pension charges of about 380 million and 140 million in our income statement in the third and fourth quarters respectively. These transactions are an efficient way to deleverage, significantly reducing the underfunding of our pension liabilities and making future negative cash flow and PLN impacts less likely. in summary we have significantly improved our financial flexibility using proceeds from the divestment of the power grids in a responsible and efficient way placing abb in a stronger financial position for 2021 and beyond to conclude let's move to slide 14 where we summarize the full year results You can see in the chart that although the short cycle business recovered in the latter part of the year, we remained in negative comparable growth of 6% for the year. Revenues declined by 5% on a comparable basis, but we managed to keep operational EBITDA margin stable at 11.1% with increased R&D investment in our business areas. Cashflow from operating activities was 1.7 billion for the year, including outflows of close to 1 billion related to special items stemming from our transformation and capital optimization programs. Operational EPS declined by 21% to 98 cents. However, excluding the difference in operational EPS from power grids, continuing operations EPS was 7% lower. The board signals its strong belief in future performance with a proposed stable dividend of 0.80 Swiss francs per share. And with that, let me pass you back to Björn for his closing remarks.