ABB Ltd

Greetings to you all and welcome to the presentation of our Q2 results. I'm Ann-Sofie Nord, Head of Investor Relations, and as per usual, I have our CEO Björn Rosengren and CFO Timo Hjelmuthala with me here today. They will take you through the presentation after which we open up for a Q&A session. However, before we begin, I would like to draw your attention to the information regarding safe harbor notices and our use of non-gap measures on slide two of the presentation. This conference call will include forward-looking statements and these statements are based on the company's current expectations and certain assumptions and are therefore subject to risks and uncertainties. And with that said, we will now kick off today's session and we will do so with a short video related to the RA's recent small acquisition of ASTI. And with that, I will now pass you over to Björn and Timo to take you through the results.

Thank you, Ansi, and a warm welcome from me as well. First, as you saw in the opening video, we have a new member of the ABP robotic family.

Asti.

is a leader in autonomous mobile robots, or as we call them, AMRs. This acquisition is a great example of our new division-led M&A process. So let's take a look at the Q2. It's great to see a strong performance, both overall and in all our four business areas. Even though our comparison from last year was the lowest during the pandemic, we now saw demand improve significantly versus last year, but also slightly up sequentially. On top of the strong underlying markets, there was an impact of stock building. But our teams have done a really good job in handling certain component shortages in the Q2 and managed to limit impacts on our customers' deliveries. That said, we expect to see continued challenges in supply chain in the coming quarters in part of our businesses. We delivered a step profit improvement in Q2, which was helped by higher volumes, a cost base which was still impacted by the pandemic, and price increases coming through and largely offsetting increases in raw material costs. I'm also pleased that we managed to deliver another quarter of solid cash flow. This year we have generated 1.2 billion. This sets up nicely for the delivery in 2021, as we have promised. As you can see on the order chart on this side, we have had a positive sequential momentum since the lowest point in summer last year. In total, comparable orders were up by 24% year over year. And the key drivers was increased customer activity in most segments of the short cycle business. We also saw comparable orders in our service business, which are up as much as 20%. We have earlier flagged that we expected improvements in the process related businesses during the second half of this year. Now we see signals of that with a positive development in several industries. In the Q2 order numbers, there is an element of customer building stocks. In this environment, with strong underlying markets combined with component shortages and cost inflation, many act to secure ability to deliver. We are managing incoming customer orders in an effort to avoid too much inventory volatility in the end-to-end supply chain. Now let's take a quick look at the different regions on slide five. Growth was strong in all three regions. We already touched upon the pandemic impact last year. So on low comparables, both in America and Europe, improved by more than 40 and 20 percent. Note that Europe was actually up 30 percent when looking at the base orders. You also remember that EMEA, driven by China, recovered sooner. Still, the region and China noted strong growth of 50% in the quarter, supported by strong development in all RBAs. As I have said on numerous occasions, a quality company like ABB should deliver a margin of over 15%. I am pleased that we have reached that level in the Q2 and thereby shown that it is possible. even though we are not there yet on a yearly basis. In the quarter, we benefited from strong markets, price increases and efficiency measures, while the overall cost basis is still fairly slimmed on the back of the pandemic. Importantly, we increased the gross margin by 140 basic points and three out of four business areas improved. But we know we face some headwinds in the coming quarters. Cost levels will come up for raw materials. Freight and travel spend and impacts from component shortages will be challenged. All in all, our performance was strong in Q2. Although we are ahead of schedule for reaching our long-term targets, we do see substantial challenges in coming quarters. But we are working hard to mitigate these. And with that, I hand over to Timo to take us through the numbers in more details. Thanks, Björn.

And now let's take a look at the results of our business areas. And let's start with electrification, where we saw solid improvements in virtually all customer segments. It was really only oil and gas, which was the moderate side of this. This led to a double-digit order growth in all divisions supported by the three regions. And as you can see on the slide, the absolute levels are high also in a historical perspective. Now Björn mentioned a certain impact from stockpiling, and EL is the area where this was noticeable. We have consciously tried to safeguard the quality of the order book when taking orders. In total, comparable orders grew 28% and revenues by 17%, and the order backlog increased by 9%. The higher volumes drove better cost absorption. EL also benefited from the earlier implemented price increases, all the while raw materials remained partially hedged at a still relatively low level. As we have highlighted earlier, this will gradually change in Q3 and Q4 as raw materials bought at higher rates are used in production. I'm really, really pleased to see a continued strong performance from EL as they improved operational EBIT A 70% year on year and increased the margin by 480 basis points to the good level of 17.4%. Looking ahead at the third quarter, we anticipate growth rates to reflect the easy comparable from last year and reach a double-digit pace for both orders and revenues, with orders growing more than revenues. Sequentially, there will be some margin headwinds from commodities and fixed cost. Let's then turn to slide 8 and business area motion, which delivered yet another quarter of solid performance. As you can see in the charts on the Q2 levels for both orders and revenues are high in a historical perspective at around 1.9 billion US dollars. This was driven by strong short cycle business across all segments. And it is fair to say that also here we noted some stockpiling among customers, although the team has consciously focused on maintaining a good quality in the order backlog. There were positive indications also in the project business, although it remains to come through in the numbers. In total, comparable orders were up by 16% and revenues increased by 11%. The operational EBITDA margin of 17.7% is also high if you compare to history, and you can see it in the chart on the right-hand side of this slide. It remained stable year on year as the adverse impact from the geographical mix was offset by the contribution from additional volume. Just like for electrification, the headwind from the raw material costs will increase sequentially in motion when older hedges start to phase out. We are also carefully watching the tightening of the supply in areas of semiconductors and electrical steel. which could particularly impact drive products division. We do expect somewhat longer lead times in our customer deliveries near term. For the third quarter, we anticipate comparable growth in orders and revenues to be somewhat below what it was reported in Q2. Next on slide nine, we look at process automation where growth returned to positive territory for comparable orders and revenues at 11 and 4% respectively. Admittedly from a low level in Q2 last year when the quarter was heavily impacted by the pandemic. The positive development was driven by broad based improvements in the product as well as the service businesses. We have earlier indicated that we expect the business environment for the process related business to improve in the second half of the year. And we now see signs of that realizing. We also saw initial positive signs for service business in the cruise segment, which have been weak during the past quarters, as you know. It looks like customers are gearing up for an uptick. in the actual cruising activities, which of course would drive the service business in PA. PA delivered a significant lift of 410 basis points in the operational EBITDA margin into the target range. On higher volumes, stronger mix from higher share of service business and impact from cost measures, this triggered a 67% increase in profit. In Q3, we expect growth in both orders and revenues to be higher than in Q2, supporting a second half 21 recovery. On slide 10, we turn to robotics and discrete automation. And as you see in the order chart, the positive sequential momentum continued into Q2. Year-on-year growth for comparable orders was very strong at 41% from the low level last year, and it was strong in both the robotics as well as in machine automation divisions and across regions and segments. Looking at the drivers, it is only really the automotive segment which does not contribute to growth. And as you know from before, we are applying a strategic approach in this segment to deselect systems business orders with low ABB content. This is an action to improve the quality of revenues to drive profitability long term. We started this already last year, so the impact on growth in orders should phase out towards the end of the year, while it will roll over a bit into early next year in revenues. In Q2, the automotive business orders were a bit over 20% of total RA business area orders, in line with the above-mentioned strategy execution. Comparable revenues rose by 22%, with contribution from both divisions improving from last year's low level and a generally strong development in the short-cycle business. The operational EBIT-A margin of 11.5% was up 470 basis points year-on-year, with substantial improvements in both divisions. The rise was primarily driven by better cost absorption due to higher volumes, positive mix from higher share of service revenues and previously implemented cost measures. We see some near-term risk for delayed customer deliveries due to semiconductor constraints, particularly in machine and factory automation. Looking into Q3, we expect growth rates for comparable orders and revenues to be lower than for Q2, given higher comparables and also earlier mentioned supply constraints. We look next at the group revenues and operational EBITDA bridge on slide 11. As you see in this table, the strongest contribution to the year-on-year progression comes from the organic development. The volume leverage was good, and we also benefited from our earlier cost actions and somewhat abnormally low discretionary spending still. Then to cash. Now, this is my favorite slide in the pack, and I'm really pleased with how we have made cash come through so far this year. After the strong Q1, cash flow from operating activities in Q2 amounted to 663 million. Higher earnings is the key driver, but the team has also done a good job at containing the networking capital in this period of strong growth and keeping it broadly stable year on year while it was up from the previous quarter. For the first half of the year, our cash flow from continuous operations is up by about 950 million from last year. This is a very good start for what we expect to be a year when we see meaningful improvement in our cash delivery. Then to finish off, I just quickly want to discuss the outlook statement. we lift our projection for comparable revenue growth in 2021 to just below 10%. This compares to the previous statement of about 5% or higher. The short cycle is already supportive and more so than we initially thought at the beginning of the year. We also feel we have stronger conviction in the process-related recovery, including the service business in the cruise segment. Our operational EBITDA margin in 2021 should improve at a strong pace towards our 2023 margin target. This is a change from the earlier statement of a steady pace and reflects the strong start to the year. In Q3, growth rates for comparable orders and revenues will benefit from the lower base due to the COVID-19 impact in 2020. We anticipate comparable revenue growth of about 10% year on year, with again higher growth rate for orders. On the margin side in Q3, I want to mention some key items to keep in mind. We anticipate positive support year on year from a good market situation and a good mix from recovering service revenues. On the other hand, and we have mentioned it earlier in this presentation, we know we will have some sequential pressure from higher input costs component shortages most likely, and also increasing cost, for example, from travel as the pandemic-related restrictions hopefully continue to ease. Let's see how things pan out, but I at least wanted to mention these factors. And with that, I would like to hand it back over to Björn.

Thank you, Timo. And I would just like to share another two slides with you. The first one being the ASTI deal, which is a good example how the businesses drive the M&A agenda. RA acquires a leading supplier of autonomous mobile robotics, or AMRs. It complements them well and further extends the offering of increased flexibility in production. Asti offers a portfolio that covers all major applications, enabled by a versatile software suite. It has had a close to 30% annual growth since 2015 and is aiming for about 50 million in revenues this year. I expect to see more of this small and mid-sized deal going forward. We have a strong balance sheet and we want to use it to grow and add value. Lastly, I would like to update you on the progress we are making towards the reduction of our carbon emissions in keeping with the goals of the Paris Agreement. You already know that our target is to achieve a carbon neutrality in our own operations by 2030. As part of delivering on that, we have joined the initiatives by the international non-profit Climate Group. They include electrifying our fleet of more than 10,000 vehicles, sourcing 100% of our electricity from renewables, and establishing energy efficiency targets and deploying energy management systems at all of our sites. Our reduction targets are now confirmed to be aligned with the science-based targets initiatives and is in line with the 1.5 degree scenario of the Paris Agreement. These are all measures and steps for us to deliver on our long-term sustainability targets. And with that, I ask Ansi to open up the Q&A session.

Thanks, Björn and Timo. But actually, before we move into the Q&A, I would just like to do a little bit of a commercial break and take this opportunity to welcome you to our Capital Markets Day, which we're hosting after the summer. On the 29th of September, first of all, we invite you to Helsinki to meet with the Motion Team. And on this day, you will learn more about their offering and strategy and also visit their operations on site. Then secondly, on 7th of December, we will host a group CMD here in Zurich. And on this occasion, we will focus on the topic of sustainable transport. And of course, that is on top of the update of the strategic process for the group. And of course, this is all COVID permitting, but you will be able to join us both on site and virtually. So now we are open for Q&A. And let me remind you that should you want to ask a question, please register by pressing star 14. And to secure the sound quality, please remember to mute the webcast as your line is open for questions. I can already now see that we have a queue for questions. And I just kindly ask you to limit yourself to two questions and we'll do our best to get through as many of you as possible. So now we'll go to the first question, and I hope we have Alex Virgo on the line from Bank of America Merrill Lynch. Alex, are you with us?

I am indeed. Antti, thanks very much. Good morning to you all beyond Timo. So two questions then, please. The first one, I wondered if you could just go through in a little bit more detail the divisional performance in demand terms in China, just to give us a little bit of colour around the sequential development momentum there and also thinking about how we've started Q3. And then second question, I wondered if you could just give us an indication of how much you think inventory building or stockpiling has helped or contributed to the growth you've seen in EL and MO. Thank you.

Thank you, Alex. Yeah, I mean, first, you know, we have 21 divisions. It will take me the whole day to go through each of them. But if we look at the four businesses we have, we see we have double digit growth, I mean, in the Chinese market. But of course, sticking out as usual here is Electrification and Motion, who has a great development in the Chinese market. Yeah, and you should also know that the comparison numbers in China, we had growth actually last year also. So it's been the growth engine for the whole last year, but we still have 15%. So this was positive to see that growth continues in China. in China. On the stockpiling, I think it's like Timo said, it's mainly we see it in the electrification business. And we say with maybe one to two percent effect on the group. That's a little bit how we look upon it. Maybe you want to add something there, Timo?

no that's exactly right about 1.5 or so in the group and maybe three is a bit more on electrification so it's actually down as an impact from q1 when we said about five in electrification great thanks very much thanks alex thanks alex and then we take the next question daniela costa from goldman sachs are you there

yes i'm here good morning everyone thanks for taking my questions um i'll ask two as well but on the first one i wanted to understand so do you still keep within your margin guidance you mentioned the upper end of the guidance for 2023 but would be interesting to hear from you given the strong performance so far what would what could be the headwinds that would take you away from that already being met in 2022 if if any And then my second question, I think last quarter you kind of alluded to doing some review within process automation that you think you were going to present to the board in October. But can you give us a little bit more color exactly what are you looking at there, given all that you have done already in the portfolio so far? Those are my questions. Thank you very much.

Thank you, Daniela. Yeah, on the Martin Gaddis, it's correct that, you know, it's great to see 15%, as I said before, in a quarter. And for me, this is, of course, show that it is possible to reach over 50%. You know, that's my viewpoint. A company like ABB should be above these numbers. I don't think, on the other hand, that we are there yet. So we... It's a one-quarter... We have still quarters to come and there are a little bit challenging for the next quarters when it comes to these material prices as well as supplies of cement conductors and anything. And it's like us, with us, like everybody else, we all don't really know what the real effects is going to be. So we're just a little bit cautious on that part. Well, it's margins. We are ahead of schedule. I think you have said that before. We still have the margin corridor for 2023. When we feel that we are there, we might make adjustments. But I think this is, from my perspective... a step target in the direction where I believe ABB should be in the long term. But it's a great improvement from all the businesses. You know, everybody's been contributing well during this quarter. So I'm very pleased with this performing. Then on PEA, yeah, PEA is a little bit different from many of the businesses that I've been working with before. It's a lot of learning for me to understand, you know, what makes these business ticks, what is the actual potential for this going forward. So we actually spent quite a lot of time understanding these business and what we need to do to get this business up to the... you know, profit levels where we are in the group. And that's a journey. I think they have great ambitions in that business to improve like every other business that we have. So we continue to do that. It's correct. I said that we will have a special review of this in September because the board also wants to understand this business, what are the potential for the future. Nothing else to add at this stage, but good to see the 12.5% really coming from the service, kicking in back again. So that's good news for ABP. I hope that's an answer that's okay. Perfect. Thank you. Thank you.

Thanks, Daniela. And now we move to Andreas Willi at JP Morgan. You there, Andreas? Yes.

Yeah, good morning. Thank you, Bjorn, Timo and Ansi for the time. My first question is around the raw material component, maybe more the raw material impact. You normally give a little bit more commentary on near-term margins for some of the divisions that you have given earlier in your speech, Timo, particularly outside electrification. Maybe you could clarify a little bit what you expect the negative impact to be relative to the likely still positive impact from continued sequential revenue growth, or maybe an indication there what the impact would have been if you were not protected by hedges still in Q2. That's my first question. And the second one on the acquisition, could you give some indication on the kind of range of revenue multiple you paid for this business? And does this highlight a much broader planned expansion or targeted expansion into kind of assembly, into logistics robots from kind of the assembly focus historically?

Yeah. Thanks, Andreas. Why don't I start with the raw material impact question? So we'll go business area by business area and talk a little bit about the drivers. So first of all, in electrification, When we look at this sequentially, we're also, of course, coming from a very high level of 17.4. And there we said that we are expecting to see the raw materials, particularly if you look at copper a little bit also on the steel, to have a negative impact. On the other hand, so far, the team has done really well. good job in pricing, but kind of like compensating everything with pricing is getting, I would say, not more difficult going into Q3. Then if you look at motion, we have impact there. We would also expect, of course, to see a negative impact, but there I think we'll also have a bit of a positive divisional mix on the other side of the equation. And then maybe the bigger question mark in motion is really, again, the semiconductors, because that could then really impact the deliveries. But so far, the teams have managed that really, really well. And then if you look at PA, there is less impact on the raw materials. And as we say, we expect stronger order growth, stronger revenue growth in PA going into Q3. And also the services growth was already now better than the overall growth. So we would not expect that much impact on this topic on PEA. And in RA, it also is maybe a bit less on the raw material price and a bit more on the component side, especially in the machine and factory automation. So those are really the dynamics.

Good. And if we look at us, it's great to see, you know, we moved the strategy of M&A process towards the divisions and they've been working hard. I think all our divisions to identify potential acquisition objects. This is the first one. And of course, we are encouraged about this. It's a small, nice company that is in growth mode, good technology. And we think we can utilize this. the platform of robotics global structure to drive good growth and good improvements here. So it's well in line with their strategy. We didn't disclose the price. That's pretty clear. But we all know that everything is expensive today. So, of course, we paid a good multiple for this business also. On the other hand... Reasonable. No, it's not crazy. I think we all think that this will add a lot of value to ABB going forward. And this is typical, one of these growth strategic opportunities where we need to. And this was a little bit of a black spot in us. We didn't have this technology. And I think this will speed up our presence in this way. How they will go forward? Yeah. This is related to a lot of material transports and logistics also. So there are a lot of applications areas where we can use this. And that's, you know, in combination with the robots, it really helps our customer to become much more flexible in their production facilities and also distribution centers and so on. So it's a good add-on. So we're very excited about this acquisition. I hope that question was what you expected. Yeah, thank you very much.

Thanks, Andreas. And then we move to Ben Uglow at Morgan Stanley, please. I hope your line is open.

Can you hear me?

We can hear you.

Very well. Good. That's always encouraging. Hi, everyone. I hope all are well. A couple of questions, please. Bjorn, I'm going to dig a little deeper on your answer to Alex's question at the beginning. You kindly told us that sequentially demand was getting a bit better. But I guess what we all want to know is if we think about the second quarter versus the first quarter, number one, is China still on an improving trend? Is it growing? And then if we look at the two other regions, 2Q versus 1Q, is it fair, if I look at your orders, is it fair for us to assume that that America's is getting better, but Europe is more stabilized. Really just the kind of idea around how 2Q has trended the overall level of demand versus 1Q. So that was my first question.

OK, let's start with that then. Yeah, China, we have read in some of the reports here that we see slowdown. But you know that China actually started to grow already Q2 last year. And you remember, remember, we had a slight growth in the China market, even though the pandemic was very hot at that time, while we saw big drops in other parts of the world. China then has become really the growth engine for us, and we've seen huge growth numbers. What's great to see here, as you remember, we saw growth in Q1 also, even though when we look at the comparison, maybe you remember that the pandemic in China actually hit first quarter the last month, last year, which made that it maybe looked like we had a little bit more growth from that perspective. Second quarter, China was up and running again. So it was a little bit more challenging from that perspective. So we think 15 percent is very strong, maybe even a little bit surprisingly strong. And The good thing, it's not only some of the businesses, it's all four of our businesses, even though we see electrification and motion, the one sticking out there on the China growth side. And then, of course, the question, how is that going forward? And that's, of course, difficult to see. We can only see a couple of weeks into this month, and we see the trend continues on a strong basis. How that will be the rest of the quarter is difficult to draw any conclusions. On the Q1 and Q2, normally, if you look at traditional ABB, first quarter, we normally have higher orders than we have revenues. And normally, in second quarter, we normally see revenues coming up, but some sequentially lower orders. This time, actually, orders grew slightly from Q1 to Q2, which I think... shows that we see a strong market. But it's clear, you know, U.S. looks very big on the paper and even Europe looks good. If you look at base orders, we're up 30 percent, which I think is a better indicator of the real demand in the market. But of course, you remember last year, these two markets were severely impacted from the pandemic, while China not. So, Yeah, I mean, it's difficult to say, but even the Q3 was quite severely impacted last year. So we should continue to see strong growth numbers both in the Q3 and Q4.

Can I make a quick... Why don't you add on that, Timo? Yeah, just a quick Europe comment, because I think, if I remember correctly, Ben, you had in your note... sequential down minus four in Europe, but we didn't really have any large orders now in Europe during Q2, whereas if I remember correctly, we actually had in Q1, this goes back to Björn's base order comment.

So your base order is a better indicator of the real demand, to be honest.

And if I look at Europe, all the countries are growing really nicely, so it's really, really broad-based in Europe at the moment.

That's a very helpful clarification. Thank you. And then just one big picture question, and I guess it sort of relates similarly to the question that Andreas asked about ASPE and the whole kind of AMR space. I remember from the Capital Markets Day back in February 2020, I guess it was, that you were beginning to talk a little bit more about, let's call it the warehousing area and the potential not just of material handling and logistics, but actually the warehouse vertical in particular. And what I wanted to know is that that is a sort of different move in terms of customer base, getting away from more sort of industrial customers towards maybe more consumer slash retail. How are you thinking big picture about the warehousing space? Is this a part of a new strategy, Bjorn?

I wouldn't say that this is a new strategy, but I think Sami and his team has been very clear. We wanted to get away from the system sales from automotive. That's clear. And I think automotive overall is a low margin business. And we've seen that. Well, we see much better margins in general industry in electronics, but also in the warehousing. And, you know, we had a great success lately with Amazon and many other customers also within this area. But it's clear, yes, we are looking into this as a strategic area where we are not just looking at the packing, you know, also transport of components and so from this part. So, yes, it is a very strategic area. It's also a very growth area where we see good potential for both robotics as well as these AMRs.

Super helpful. Thank you very much indeed. I'll pass it on. Thanks. Thanks, Ben.

Thanks, Ben. And then we open up for Martin Wilkie at Citi.

Thank you. Good morning. It's Martin from Citi. The first question is just coming back to acquisitions. And I realise you're not disclosing the... the price of the robotics that you've done this morning. But just more generally, you've obviously got some announced disposals already. Maybe we get some more of those when you do the process review later in the year. When you think that you could be getting several billion dollars coming in over the course of the next couple of years or so, how are you thinking about the M&A environment? You're commenting on the price as being... reasonable or full or whatever the wording might be, but is there an environment still where you can buy these higher tech businesses at reasonable rates of return? That's the first question.

Thank you. Thank you, Martin. I think it's a good question. Yeah, it's the acquisition that we haven't disclosed the price there, but yeah, of course, it's a reasonable margin. It's not super high multiples, but it is high multiples for a business like that. But we think, you know, we're selling bigger businesses, which we think is a very good time of doing that and we're buying smaller technology business which will easily be integrated into the divisions and drive growth but also drive technology development in these places so i definitely think this is to be expected going forward all our divisions have been working a year it's actually part of their variable compensation to have these uh these potential M&A candidates in this business. And we say also on the software side. So the list of potential candidates are growing every day and we are approaching them. We're looking at what are the synergies, what are the growth opportunities and how can the division drive this. So I think this is an exciting part. This is going to cost some money going forward. And we have been very clear that the money from these divestments we hopefully can use for these kind of acquisitions. If we don't, yeah, of course, we're not going to be a bank. We always said that. But we have... The businesses are getting encouraged by this strategy, and we think there are a lot of opportunities here. Why don't you add on that a little bit, Timo?

Yeah, so I think the question is a really good one, and we are, of course, fully aligned here. And we all the time, when we talk with our businesses, we look at make versus buy. And I think it's important to note that our organic R&D is going up as well. And in this environment, you often get better return on organic R&D. And then you have to complement that with some stuff to get speed. And that's exactly what we are, I think, doing here with Asti. But it's not like, you know, again, I just want to remind that we have a quite structured view on how we look at this and do the comparisons before we pull the trigger.

Thanks, that's really helpful. And the second question is related to M&A, but on one in the past. So GEIS, obviously another good performance from electrification. Are all the GEIS benefits now done and in the margin? So we should see the incremental benefit of those cost savings from GEIS beginning to sort of peak, or is there still a lot of opportunity from that acquisition as well? Hmm.

I've been very clear that I think this is the GIS acquisition, one of the biggest value drivers in ABB at the moment. And they've done a great job in both putting the footprint in place, the one for the future, but also replacing old technology with new ABB technology. The journey is not there yet. We still have both factories to close and to consolidate. And there are still replacements of products, especially on the switchgear for the North American market, where we think there is good potential for improvement also going forward. So there are more to come when it comes to synergies from putting these together. On the other hand, we've seen a tremendous development from the electrification people and actually even surprised me that the improvement has gone that fast.

Great. That's very helpful. Thank you.

Thank you. And let's see if we have Shane McKenna from Barclays on the line. Are you there, Shane?

I am here. Good morning, Bjorn, Timo and Antti. My first question actually is on robotics and discrete automation. Just wondering if you can give us a feel for what the drag on margins was in Q2 from delivering these legacy turnkey orders, as well as what you're seeing now in terms of the margin profile of the current order book and how that stacks up versus the sort of 13% to 17% midterm target. And then as an add-on, Where are B&R margins now tracking within that range, given the management changes that we had several quarters ago and the growth that you're seeing? And then I have one follow-up question.

I'll come back on that one. Why don't we take the robotic first? Let me start and then I hand over to the part. You know, we said and we're very clear that our robotic business is a 15 plus business. And that's our target for 2023. I think we are moving in this direction. We said we'll be over 10 percent during this year. It's gone a little bit faster there. And yes, the automotive is becoming less. But in our revenues, there is still a certain amount of drag. So why don't you give a little bit of clarification on that, Timo?

Yeah, thanks, Bjorn. Thanks, Shane, for the question. So We said earlier that this business is maybe sort of more than 100 million. So on annual basis, you could say maybe 150 number like that. So it is meaningful there. I'm not going to go to the exact margins, but I think it's important to note that now when you look at our orders in robotics and discrete automation business area, automotive is between 20 and 25 percent of the orders used to be about 40. So this is a really meaningful strategy change. And how we follow this is, of course, the gross margin. And when we look at the gross margin now in the order backlog of RA, it is clearly trending up. And that will then help us, as we have said, to get clearly back to the to the corridor without giving any timing stamp here on that matter. And then also in machine and factory automation or B&R, the margin is clearly improving, I would say, towards the target which Björn has given us in general.

Perfect. Very clear. In terms of EL, are you expecting a similar recovery in oil and gas and conventional power generation demand for that division as we go into H2, as you're guiding with MPA? And just trying to get a feel for how large that segment is in North America for EL. I think from memory at the divisional level, it's around 20%. Is it slightly larger in North America? Is that one of the reasons for the sort of lower growth? in EL in North America relative to peers.

So you are checking now oil and gas for electrification, not for process automation, just to make sure we get the question right.

Correct, correct. Because there's been an end market that you've been calling out for some time that's been sort of holding you back.

Yeah, it is not.

No, that's probably more in PA, I think, than electrification.

Yeah. Well, but there is, of course, medium voltage stuff in that market as well in electrification. But it's not a significant part. But I would say overall, when you look at the U.S. growth, yes, maybe proportionately, we have a bit bigger proportion in U.S. in electricity. medium voltage versus low voltage, which probably has impacted the growth a little bit. But I would say the oil and gas is not a huge driver for our EL business. It's clearly a bigger driver in the process automation.

Very clear. I'll pass it on. Thanks a lot.

Thanks, Shane. Joe Giugiano at Cowen. Are you on the line for the next question, please?

I'm here. Can you guys hear me?

We can, indeed.

You're fine, Joey.

Hey, good morning. So, a question, a few questions on the robotics side. So, for ASTI, I see in the slides, you know, it's mostly auto-levered currently. It's mostly Europe-levered. Do you see this as a kind of a flagship business that you expand and kind of bolt other acquisitions into? Do you have aspirations for this to be, like,

broaden from an in-market and geographic perspective for that business you know let's talk about robotics a little bit as you know robots been with abb started up it was actually one of the really pioneers within this area has always been a place in abb maybe from some people said a little bit of a odd business within the group i think it's more coming into the automation and taking it broader viewpoint. We think robot business is, you know, one of our really core businesses when it comes to driving, transforming the industries point. And I think it's even getting even more focused now after the pandemic where people see flexibilities coming higher up on the agenda. Yeah, I mean, it's one of our businesses. We have 21 businesses in ABB, and I always said that I think the businesses we are are number one and number two in the areas where we operate. I think robotics is a great business, and I think it has more profit potential, but growth, definitely. This is one of the strongest growth areas that we have in the group going forward. That's pretty clear. Yeah, why don't you add to that?

Yeah, thanks. On the AMRs in particular, I think we said in our presentation today that we are right away starting this now also in China. And we have already gotten customer inbound that it's great that, you know, this is now ABB because it's, of course, totally different to go with this kind of offering as ABB to China than as a company which has approximately, as we said, 50 million revenue revenue. this year so we think that we can expand the Asti offering quite nicely through our channel and also the exposure to automotive we think that the AMRs as was discussed earlier in this call will actually get us position in a broader market and longer term will help us to even better diversify the overall customer impact to better quality of revenue as we have spoken earlier.

And to add on that, you mentioned geographically. I think we've been very clear on that part, that we are market leader in Europe and in China. That is part. Our market share in North America is not as strong as in other parts of the world. And that's one of the areas where we are planning to strengthen our presence.

And in the press release, you mentioned robotics in construction and broadening your knowledge. exposure there. Can you maybe talk a bit about that and maybe last, one of your competitors recently buying a cloud-based automation solution. I mean, obviously different markets there, but just curious where you think you are on software and how you see that progressing, whether it's in-house or through partnerships, however you want to kind of tackle that. Thank you.

Yeah, I mean, robots in the strategy that has been very clear is trying to move away more from the systems within automotive, which is a big risk, low margin. But also the whole automotive segment is a low margin than other segments. So we are moving towards general industry, as I said, electronics, robotics. very much today logistics, which is very growing. But one new area is construction. But construction is maybe not building a house out on the field. They build the modules that are then being assembled out in the field. So building these modules, there are more robots being used. And it's a new segment for us. And we talk a little bit about it because I think it's exciting and there are some potential for that. Then on the software side, I think we've been very clear with the strategy that we have in software. We are growing pure software solutions. We have embedded software, building our domain expertise and a lot of software included in our product. That has continued to grow in the part. We are, of course, also looking for potential software companies that fits well in with the businesses where we operate and that we can see synergic parts from that. But we think that our offering today is both strong and well-positioned. positioned and a lot of software embedded in the products. And the pure software is also growing a lot, especially in process automation. Anything you'd like to add there? You're the software guy coming from Nokia.

No, I think you covered it well. But I think, as you said, we are executing a clear strategy and I think we are on a good path on that one.

Yep, you happy with that, Joe? I hope so. You got quiet. Then we see James Moore.

I am, thank you. Very good.

James Moore from Redburn. Please, I hope your line is open now.

Good morning, everyone. Yeah, thanks. I've got one request, if I could be so bold, and two questions. Bjorn, you mentioned... base orders are a better indicator of demand. And I think we'd all agree. And it was a shame when you stopped them. So if you could bring them back, that would be great. And my two questions are on raw material and robotics and factory automation. So Timo, really, maybe for you on raw material, thanks for the colourful division. But I wondered if you could in any way size how much bigger the gross raw material year-on-year dollar million impact is going to be in the third quarter versus that which you saw in the second quarter. I understand that there'll be pricing on the other side, but just trying to flavor what the change is. Are we talking about a 25 million buck increase in year-on-year pressure, or is it a big $250 million impact? I have no idea, really, because it's hard to understand your raw material exposure. And the second question is, the 41% organic order growth in RA, could you, I'd love to the three numbers, but if not, could you flavor the differences between auto-robotic, auto-non-robotic, and factory automation? And I guess I'm really asking, was factory automation growing faster globally than the non-automotive side of robotic? Thanks.

Yeah, why don't I start with the raw material? So thanks for the question, James. So it's definitely in between your 25 and 225. But jokes aside, Q1, I think we kind of like said that the pricing positive impact was about 25 million and that well compensated. And if you calculate the pricing impact from our bridge now, it's somewhere around 60 million and you can all do the math. And this is, of course, compensating now for a bigger impact in raw material. At least if you look at copper, some stuff has now started to stabilize at least on a very high level. Steel is, I would say, even higher now proportionately than copper. So it's going to be, I mean, we don't know exactly how this is going to come out, but it's going to be definitely closer to the Q2 number than the Q1 number. So that much we can say about it.

And the other question was, what was that?

It's on the robotics and growth. Robotics growth. Yeah, okay. Sure, sure. Automotive robotics.

Yes, give you a little bit of a clarification. If you actually take out the totally automotive part of the business, it grew about 60%. So that gives you a flavor. If you take out just the robotics, Let's say the automation part or the system part of that business, it grew approximately 40 percent. Was that correct? 30 or 40 percent. I think I got somewhere around that 40 percent growth. And then if you include the whole automotive part, we are a little bit above 20%. I think that's where it is. When you see factory automation, we are closer to 100% growth. So that business has been growing like crazy for two quarters at the moment.

That's great, Carla. Thank you so much. Thanks.

And now we only have a couple of minutes left. So, Jonathan at Exane, if you promise to be fairly quick, please, we'll open up your line. Thanks.

Okay, I'll try. There's been a few questions about the ASTI acquisition. And I guess maybe people are just trying to understand the scope of your ambition. In the press release, you talk about a $14 billion market by 2025. I mean, you've also mentioned during this call, you're number one, number two in robotics, depending on the segment. I mean, a 50 million business doesn't address very much of a 14 billion market. Maybe what we're just all trying to understand is what your ambition really is in terms of the verticals you're going to go into. How much can you upscale this business given the platform you have in automotive? You know, what are the sales synergies there? I mean, really, to become a number one or number two player in AMR, is that your ambition, maybe for sub-segments of AMR? Yeah, really, what are you trying to achieve here?

Let me say, first, the MR business is a very scattered business. There are so many small players in there. So you probably will see some kind of consolidation also going forward. It's quite a big market and you can use it in all different regions, everything from logistic to automotive, but also to general industry. So Yeah, I think their ambition is that this is definitely growth acquisitions, meaning using the technology platform and then utilize our platform we have all over China and Europe, but also in North America. And that's where we're going to drive growth in this area. So I think the whole robotic team is quite excited. We can be a little bit difficult to go in on the growth numbers because we haven't given them out yet, but it's clear big growth that we are expecting from this business if it's going to be successful going forward.

Can I throw a software comment in here now?

Yes, sure.

Because this area... will benefit from the new software on the whole lidar technology similar technology which is used in mapping applications when you do street mapping and that kind of stuff where i was earlier involved a bit and that's why technology-wise this will get more complex and it's going to be tougher and tougher for all these smaller players to survive. That would be my sort of gut software comment on here. So there's a lot of opportunities to expand this from technology perspective.

And we could spend quite a lot of time looking at different opportunities here and we think this is definitely the one that suits us very well both technology-wise and the potential to grow. Thank you. Thanks.

Thank you for that. And with that, we round off for today. Thank you very much for taking the time to spend it with us. And we'll see you again in about a quarter's time.

Yeah, I wish you a good vacation. Thank you. Bye-bye.