ABB Ltd

Greetings to you all, and nice to connect again as I welcome you to the presentation of ABB's third quarter results. I'm Ansa Fanog, Head of Investor Relations, and next to me here is our CEO, Björn Rosengren, and our CFO, Timo Hujamotila. They will, as usual, take you through the presentation before we're not for the Q&A session. But before we begin, I should mention the information regarding safe harbor notices and our use of non-gap measures on slide two of the presentation. Also, this call will include forward-looking statements which are based on the company's current expectations and certain assumptions and are therefore subject to risks and uncertainties. And with that said, I will hand over to Björn and Timo later on for their quarterly comments.

Thank you, Ansi, and a warm welcome from me as well. I have to say I'm very pleased with our performance this quarter. The operation numbers show strength and verifies that ABB is moving in the right direction, even faster than we originally had anticipated. You have probably already figured out that I'm very happy about the high margins of 16.6%. It looks like we likely will reach our margin targets one year early, but I'm also pleased that we executed on our promises of portfolio management In my view, today's result is a good indication that we are improving operation performance to our new way of working. Accountability, transparency, and speed. To me, some proof points are our strong and broad price execution. The record high margin, we have made division-led acquisitions, we divested non-core operations, and we completed the spin-off of Acceleron. In short, we are making ABB a more focused and well-performing company with focus on being a technology leader in electrification and automation. That said, we still have a couple of matters that need to be resolved. One such item is the legacy Kusil project. We now book the provision related to this which impacted EPS performance in the quarter. We feel confident that there will not be any additional material provisions related to these matters. I will come back to this a little bit later. Before we move on, I want to comment on e-mobility. We have said that we want to list part of this company, and we remain committed to this. But given the high volatility in the capital markets, we do not see it happening this year. We follow the market development closely and we'll come back when we feel circumstances are right. Now let's look more closely at orders and revenues on slide four. In our results, FX, especially the continued strengthening of the dollar, was a big negative swing factor of 9% to 10% when you compare our reported orders and revenues with the organic development. But looking beyond that, we had another strong growth quarter with comparable orders up 16%. We saw a stable to positive development in most customer segments. Easing of component constraints, will shorten delivery lead times, which should trigger a normalizing of the order pattern. Still, it was another strong quarter for orders. It was actually the seventh consecutive period with a book-to-bill ratio above one. And our order backlog remains on a record high level. Looking at the revenue chart on this slide, you see that this was one of the strongest quarters. Comparable growth was 18% with a positive development in all business areas. This reflects a strong price contribution, but I was also pleased to finally see volumes released to a greater extent than in the previous quarters. Deliveries were held by better availability of electrical components, Another positive was that our China's business faced less business disruptions from COVID lockdowns. Now let's take a quick look at the different regions. Both America and Europe improved by 20% or more. They clearly outpaced the 4% growth in AMEA. In America's the important U.S. market increased by 29% on a strong development across most segments. In Europe, orders increased in most of the major markets. In the AMEA region, China declined by 2%. Three of our business areas saw lower orders in China, with only motion in positive territory. Let's turn to slide six and our earnings outcome. Gross margin is important, and I was pleased to see an improvement of 90 basic points to 33.5%. The high volumes clearly helped, but also very good price execution of close to 7% for the group. We increased operation EBITDA by 16%, but the underlying improvement was even stronger. If we exclude the negative effects, earnings were actually up by 27%. I earlier mentioned the strong margin of 16.6%. We achieved this through an impact from high volumes, good operational performance, and well-executed price management. We are clearly becoming more efficient. I mentioned the Concealer Project earlier. As a reminder, this is a legislative project dating back to 2015, and we are now finally resolving the remaining matters of this topic. This triggered a non-operational provision of $325 million in the quarter. So on the back of this charge, despite our strong operational performance, EPS declined from last year. We feel confident that there will be not any more additional material provision related to these matters. Since the Cucilli case was reported, ABB has spent considerable time and efforts, including launching a new code of conduct. educating employees and implementing control system to prevent something similar to happen again. It is very important that our stakeholders feel confident in ABB and our business. With that, I hand over to Tim.

Thank you, Björn. And greetings to everyone also from my side. First, I want to connect to Björn's Kusile comment. Once this is resolved, I would say that besides the one non-core item, of max 100 million of risk, which we have mentioned to you already before, we are now in normal course of business. Fundamentally changing ABB's risk profile has been a painful journey during past years. Now we are pretty much done. We have a strong balance sheet, we have a net positive pension position, and we have not been doing EPC business in a while, and it is not coming back. So we are in a good position going into 2023. Okay, let's then look at the performance in the business areas, which actually all contributed to comparable growth as well as earnings and margin improvement. Starting with electrification, where we continued to see strong customer activity, which resulted in comparable orders being up 20%. Looking at the total picture, we saw strength in all customer segments and all regions improved at a double-digit rate. If you take a slightly more granular look, we actually saw softness in some segments in China, which declined by 4%. In Europe, Germany stood out in the sense that orders declined. Germany is a distribution-led market. and we saw distributors bringing inventories to what seemed to be a normalized going forward level. I should also mention the very strong comparable order growth in the US at 37%. It was good to see that pricing was a strong top line driver also in this quarter. But importantly, we now also saw volumes improving as a result of a generally strong market and easing of supply chain constraints. This helped momentum in customer deliveries, also in distribution solutions, which earlier has been hampered by semiconductor shortages. In total, comparable revenues grew by 22%, but still the order backlog increased to all-time high level of 6.8 billion, as book-to-bill remained about one. Electrification's operational EBIT-R margin came in at a very strong 18%. the highest level in recent history. This was primarily driven by a good development in volumes and the continued strong price execution, which more than offset cost inflation. The margin expansion of 210 basis points admittedly included approximately 50 basis points tailwind from a two years old insurance claim. Looking ahead into the fourth quarter, we expect double digit growth in comparable revenues, and the seasonal pattern to repeat, meaning a sequentially lower operational EBITDA margin. Let's then move on to Motion on slide 8. Motion's orders again came in at around 2 billion, despite the headwind from the stronger dollar. In addition to a strong underlying market, the 24% comparable growth was also driven by large orders, including the approximately 170 million in traction orders. A really good example on how we are supporting sustainable mobility in line with our purpose. Our cutting edge technology include high efficient traction converters and motors that will power more than 300 new trains, reinforcing Europe's railway network. Looking at the revenue chart in the middle of this slide, you see a clear acceleration in comparable growth to 23%. In addition to the continued solid pricing execution, we now saw volumes contribute to growth, helped by strong demand, improved supply chain, as well as a sequential recovery in customer deliveries in China as COVID-related business disruptions eased. The strong top-line development was also reflected in Motion's operational EBITDA margin of 17.8%, as higher volumes facilitated an improved fixed cost absorption. Price increases continued to offset the negative impact from higher input costs, but also a slight negative product mix, which was triggered by high deliveries of electrical motors. The margin increased by 40 basis points from last year, which is a strong outcome, also taking into account that this includes about 60 basis points dilution from the Dodge divestment. Looking ahead into the fourth quarter, motion is facing a challenging revenue comparable from last year. Hence, we anticipate a sequentially lower growth rate to comparable revenues. We expect the operational EBITDA margin to decline slightly, a Q4 pattern you recognize from earlier years. Turning then to slide 9 and process automation, for which the underlying market activity continued to be strong. Particular strength was noted in end markets like gas, mining and refining, while there was some signs of headwinds in the more energy-intense segment of the metals industry. Services was up 12%. VA's total comparable order growth of 3% was impacted by the timing of customers placing orders, particularly in the energy industries and marine and ports divisions. Regionally, Europe and the Americas both saw high single-digit growth, while Amea declined as China orders were down 11% from a high comparable from last year. The sequential decline in the order backlog that you can see on this slide was mainly driven by FX movements. In constant currencies, the order backlog increased compared with the end of the second quarter as the book-to-bill ratio remained above one. Revenues grew 6% on a comparable basis with contribution from all five divisions. We did see a sequential easing of component shortages but are not totally out of the woods yet. Looking at profitability, you can see that the operational EBITDA margin reached the highest level in recent history at 15.3%, expanding 160 basis points from last year. As a reminder, we have earlier mentioned to you that Turbo has roughly 180 basis points for its positive impact on the PA margin. Higher volumes and mix were key drivers, but also some benefits from earlier taken efficiency measures. It is great to see that the team's conscious efforts to improve the gross margin in the order backlog is now being realized in revenues. The margin trajectory is clearly moving in the right direction. Looking at the expectations for the fourth quarter, I note that PEA had very high revenues in Q4 last year, and consequently we anticipate a low or even slightly negative comparable revenue growth rate in Q4 this year. we expect the operational EBITDA margin to be similar to last year's reported level, even excluding the high margin Acceleron business. On slide 10, we turn to robotics and discrete automation, where overall customer activity remained at the high level. That said, the lower comparable order growth reflects customers returning to a more normal order pattern as they seemingly anticipate the easing of supply chain constraints to shorten delivery lead times ahead. In addition, there were some signs of customers taking slightly longer to place orders, but we still see a robust opportunity pipeline. Looking at comparable revenues, it was good to see RA return to positive growth of 12%, after having been held back by shortages of electrical components and COVID-related lockdowns in China in recent quarters. While it is still no walk in the park, we would expect this improved supply situation to sustain and support deliveries from the backlog in both divisions. I'm also happy to say that the new robotics manufacturing site in Shanghai is now fully operational and volumes were transferred during the quarter. Similar to the other business areas, RA's profitability benefited from higher volumes and a positive price impact as the operational EBITDA margin increased by 170 basis points to 12.8%, underlined by both divisions in double-digit territory. For the fourth quarter, we expect an even stronger growth rate for comparable revenues than what we had in Q3, supporting some sequential margin improvement. Moving to slide 11, showing the group operational EBITDA bridge. As you can see, the comparable earnings improvement benefited from our strong pricing execution and the recovery in volumes, which more than offset the adverse effects from cost inflation. acquisitions and divestments, i.e. mainly dodge, as well as the impact from changing ethics, were slightly diluting on a group level. Let's now look at our cash flow on slide 12. It was good to see our back-end loaded cash flow expectations for the year coming through, with the third quarter cash from operating activities in continuing operations at 793 million. Compared with last year, the cash impact from better operational performance was, however, more than offset by negative movements in trade working capital. The reasons primarily being a higher build-up in inventories and less favorable change in trade receivables to support strong continued order intake and higher revenue levels. In this quarter, we had a negative cash impact of about 125 million from the exit of one non-core legacy businesses as announced in Q2. Looking ahead, I want to remind you about a couple of items which will impact our future cash flows. First, Björn mentioned earlier the Kusilä provision of about 325 million. This is expected to impact our cash flow in the coming quarters as we finalize the settlement. On a more positive note, we also receive about $1.4 billion in cash flow from investing activities from the sale of the remaining stake in Hitachi Energy as we expect to close the transaction now in Q4. Now you have heard us talk about being more active on the M&A side. So before I hand over to Björn, let me briefly walk you through what we have done here. We are actually picking up the pace. Admittedly, they are small tickets, but this is natural since smaller tends to be easier to find and close. The important thing is that our new processes work. Through the implementation of the ABB way, we have significantly changed how we work with M&A. First, we have increased the analytical discipline for acquisitions. Then, as a consequence of the decentralized ABB way operating model, we have transferred the responsibility to build the target pipeline to the divisions, i.e. close to the market. Each division is different and has different investment needs to secure future growth. We firmly believe that this new setup will result in more focused and accurate growth activities. We simply think that doing many smaller deals is better for the buyer. Björn mentioned earlier division-led acquisitions in this quarter. Motion announced their first two acquisitions in a long time. Both the Siemens low-voltage NEMA motor business and the Powertech converter acquisition will help respective divisions to further cement their leading market positions. And then looking at the grey dots on the right side of this slide, you can see that we have also driven minority investment through our divisional lenses. Both the in-charge energy and numerous majority acquisitions made earlier this year are good examples that these minority investments can later also become acquisition targets. So in summary, I feel we are on the right track to drive value creation also through inorganic growth. And with that, let me hand over to Björn to some final comments.