ABB Ltd

Greetings to you all, and nice to connect again as I welcome you to the presentation of ABB's second quarter results. For those of you who don't know me, I'm Ann-Sofie Nord, Head of Investor Relations, and next to me here is our CEO, Björn Rosengren, and our CFO, Timo Hiamotila. They will take you through the presentation before we open up for the questions later on. But before we begin, I should mention the information regarding the safe harbour notices and our use of non-GAAP 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 now with that said, I hand you over to Björn to kick off the presentation.

Thank you, Anssi, and a warm welcome from me as well. In my view, the second quarter is a strong delivery from us, and I'm pleased with the outcome. I especially want to mention the comparable order growth of 2%. This is an improvement from the already high level last year, and I'm pleased that we achieved yet another quarter with a positive book-to-bill. I will talk about the drivers in the coming slides. The supply chain was smooth and we executed order backlog and reached 17% growth in comparable revenues. And all business areas increased at a double digit rate. We reached a new record level for both absolute operational EBITDA of 1.4 billion and a margin of 17.5%. And all business years reported a margin above 15%. A strong achievement in my view. I am pleased for the teams reaching the strong result, supported by focusing on the right markets and customers and successfully working through the ABB operating model. We also improved cash flow from last year to 760 million. Timo will talk more in details, but just to put some healthy pressure on you, Timo, I expect to see cash conversion improve in the second half of the year. This will support our cash generation to a good level for 2023. Portfolio optimization continued in the quarter. We closed one deal in the motor business in motion and announced one small software technology deal, adding smart home energy efficiency technology to electrification. Just after the end of the second quarter, we closed the divestment of the power conversion division in electrification. This makes the completion of the three divisional exits we first mentioned in 2020. Finally, I want to mention a new innovation by Process Automation. You know that I'm a fan of the marine propulsion business, and this new Dynafin technology will improve propulsion efficiency by 25% and reduce fuel consumption on ships. Dynafin is targeting small to medium-sized vessels, and it will complement our existing market-leading ACIPOD offering. Now I want to show you a short video clip on it. I am proud about the technology know-how we have in ABB, and this new groundbreaking concept is one good example. Now, let's turn to page 4 for some more market comments. In the second quarter, we saw the strongest order momentum in the systems and project-related off-ray. This is often linked to the medium voltage segment. It supports growth in divisions like distribution solutions, system drives and large motors and generators. The healthy momentum in medium voltage more than offset some of the softening in the short cycle business. Taking a helicopter view on the different segments. I would say that demand increased or remained stable everywhere except for in buildings. Residential construction declined in all regions. And while commercial construction was solid in the US, we noted some softness in China and Germany. Comparable orders increased in three out of four business areas. Only robotics and discrete automation declined as customers normalized order pattern. There was also additional sequential impact from customers in China adjusting inventories. In total, I'm pleased that we have achieved a positive book-to-bill ratio of 1.06 and the order backlog is now 21.9 billion. Now, let's turn to slide 5 and look at the market pattern from a geographical perspective. On this slide, you see that Americas and Europe contributed to comparable order growth. In Americas, all three key markets improved. Europe increased slightly despite decline in two largest markets like Germany and Italy. Asia, Middle East and Africa declined slightly as the broad weakness in China more than offset the strong growth in, for example, India. Now let's turn to slide six and our earnings outcome. This is my favorite slide this quarter. It shows that we improved our operational EBITDA by 25%. It also shows the all-time high margin of 17.5%. And importantly, this was driven by the increase of gross margin to above 35%. Gross margin was up in all four business areas, backed by operational leverage or higher volumes and positive pricing. In total, the pricing impact for the group was a strong 5%. Out of this, about 3% was carried over from last year. Before we move on, Let's look at the corporate and other outcome of minus 143 million. This is the result of corporate cost at the normal level of about 75 million, but a low outcome for e-mobility. We recognize that this is lower than we expected coming into the year. In the quarter, there was inventory-related provision triggered by a shift back to a more focused product strategy and some additional technology investments to secure a continued leading market position. I expect the new management to have improved the operation performance toward the end of the year. On the positive note, it was good to see that orders were up 73%. With that, I hand over to Timo.

Thank you, Björn. And greetings to everyone also from my side. Let's then move to electrification on slide seven. Electrification was again facing a tough comparison period, but still improved its comparable orders by 3%, with total orders reaching $3.9 billion. This was driven by positive momentum in our systems-related medium voltage offering. Demand remained firm in most customer segments, and we saw some sizable wins in both data centers and the oil and gas sectors. Just like in the previous quarter, residential construction remained weak across the regions, impacting primarily smart buildings and to some extent installation products. Commercial construction remained stable in the US market with institutional commercial buildings such as healthcare showing resilience. We did, however, start to see some weakness in China and Germany. Now, looking at the chart in the middle, comparable revenues grew strongly by 11%, with volume and price contributing more or less equally to the quarterly revenue growth. The recent, consistently positive trend continued, and revenues now surpassed $3.7 billion, the highest level in many years. We saw double-digit revenue growth in all divisions except for in smart buildings and installation products, where the higher exposure to residential construction slowed growth. You can also see that the book-to-bill ratio was again above 1, resulting in further increase to the order backlog, which sits now above $7 billion and should continue to support revenue generation through 2023. It's great to see electrification's operational EBITDA margin reaching a record high of 21.1%, up by 350 basis points year on year, driven by a strong gross margin improvement on the back of operational leverage on higher volumes, as well as strong pricing. I want to mention the strong performance improvement in distribution solutions, where a strong execution of the order backlog as well as the structural profitability efforts now come through in the numbers. All in all, we are super happy that EL is now having a best-in-class performance. A really good basis to focus on further growing this profitable business. Looking ahead into the third quarter, we currently expect a somewhat lower growth rate in comparable revenues than what we reported in Q2, and the operational EBITDA margin to be broadly similar to Q2. Let's move to slide eight and the motion business area, which again had an excellent execution. Comparable orders grew by 3% from last year's high level, driven mainly by strong momentum in the systems related offering, with total orders again passing the 2 billion threshold. When looking into the details, one can see that the strongest customer activity was surrounding our medium voltage offering. This triggered a strong order growth in the system drives and large motors and generators divisions, as well as in the tightly linked service business. I'm pleased to see the order backlog gross margin in all these divisions is holding strong or improving, which shows we are not only continuing to grow orders, but doing so in areas where we are driving value to our customers with our offering. This is good news to compensate for some of the softness in the more short cycle business. Regionally, orders increased in all three regions on a comparable basis, as declines in the US and China were offset by strength in other countries. Revenues were up sharply by 22%, and you can see in the chart in the middle how the strong backlog execution and strong price management now resulted in absolute revenues landing just shy of 2 billion. On another positive note, this was the first quarter that the motion business area passed the 20% mark with an operational EBITDA margin of 20.4, up by 400 basis points from last year. This was driven by an efficient execution of the higher volumes and previously implemented price increases, which more than offset the negative impacts from higher input costs. Additionally, the margin was somewhat supported by a positive divisional mix due to the strong growth in the drives business, as well as margin improvement in the large motors and generators division that benefited from ongoing self-help measures. Looking ahead into the third quarter, we anticipate a low double digit growth rate in comparable revenues and somewhat of a sequential softening of the operational EBITDA. Then to slide nine and process automation, where customer activity was high across the segments. The project pipeline in the market remains robust, although the timing of some large orders hampered growth rates in the quarter. Orders came in at $1.7 billion and were up 6% on a comparable basis. Segments to highlight would be the oil and gas segments, where we continue to see good investments in the US, but also ports, refining, petrochemicals and the energy-related low-carbon segments. Comparable revenues grew by 19% with contribution from all divisions and double-digit growth in all three regions. We're really happy about process automation achieving an operational EBITDA margin of 15.4%, representing an improvement of 110 basis points year on year. This is even more notable as last year's margin included some 190 basis points contribution from the now exited Acceleron business. This improvement was driven by most divisions on the back of better project execution and continued benefits from delivering higher volumes from the backlog with improved gross margin. I particularly want to mention measurement and analytics, where the operational turnaround has resulted in the division now delivering a margin well above the business area average. Job really well done to the team. Looking at our expectations for the third quarter, we foresee the growth rate for comparable revenue growth to be similar to what was reported in Q2 and a somewhat lower sequential operational EBITDA margin, depending on the revenue mix. On slide 10, we turn to robotics and discrete automation. Let me start with the margin, as it is really nice to see that RA has crossed the 15% margin threshold again. Operational EBITDA was $141 million and resulted in a margin of 15.3%. This represents an improvement of 710 basis points from the low level last year. which was hit by missing volumes from the China lockdowns and tight supply chain. We now saw the operational effects from higher production output and strong price management. Let's then take a look at the orders and revenues. As expected, the order growth declined at a double digit rate in both divisions as they continued to be hampered by customers normalizing order patterns on the back of shortening delivery lead times. Additionally, some inventory adjustments among customers, particularly in China and mainly related to the robotics division, added further sequential pressure on orders, which resulted in a 22% comparable decline year on year. These inventory adjustments in China are expected to persist also into the third quarter. From a customer segment perspective, the automotive segment remained stable at the high level. However, that was more than offset by declines in other segments, particularly in the machine automation and electronic segments. Revenue execution rebounded and was up 27% on a comparable basis, driven by both volume and price. For the third quarter in 2023, we expect a low single digit growth rate for comparable revenues and a slight sequential softening of the operational EBITDA margin. Moving on to slide 11, showing the group operational EBITDA bridge. The profile is very similar to the last couple of quarters, with the earnings improvement driven by strong operational performance. the impacts from our strong price execution and leverage on 17% comparable revenue growth more than offsetting the adverse effects from cost inflation. All in all, 25% improvement in operational EBIT R with 200 basis points increase in margin. As Björn said, the ABB way operating model is starting to work and the teams have done a really great job executing their strategic mandates. So big thanks to the ABB teams on achieving this record margin. Now let's move on to cash flow on slide 12. Cash flow from operating activities was $760 million, up $378 million from last year, supported by higher earnings and a lower networking capital build-up compared with last year. I acknowledge that the cash conversion could have been a bit better, and we are working to improve it during the second half of the year, so the healthy challenge is accepted. Networking capital increased sequentially, mainly driven by higher receivables, triggered by the strong revenue growth, as well as slightly higher inventories, as we continue to build order backlog. I can assure you that this is a key topic in our business reviews and I'm confident that we will deliver a strong cash performance this year. And with that, I would hand over to Björn to round off this presentation.

Thank you, Timo. Let's finish off with slide 13 and some outlook comments. We leave our growth guidance for comparable revenues in 2023 unchanged. But our margin performance in the second quarter was somewhat stronger than we initially anticipated. Consequently, we feel confident enough to sharpen our margin guidance to above 16%. For the third quarter, we anticipate a low double-digit growth in comparable revenues and operational EBITDA margin to be slightly up from the 16.6% we reported in Q3 last year. Now, Ansi, let's move to the questions and answers.

Yes, let's do so. And for those of you who have dialed in on the phone, you press star 14 to register to ask a question. And just a quick reminder that in order to secure the sound quality, please remember to mute the webcast as your line is open for questions. But you can also put questions through the online tool in the webcast. This should be visible in the bottom right corner of your screens. For the phone lines, we really want to let through as many of you as possible. So I kindly ask you to limit it to one question and then get back in line for any additionals you may have. And with that, I suggest we open up for the first question from the audience. And we start with Gail. Your line should be open, I hope. Are you there, Gail? Maybe, maybe not.

Can you hear me now?

Now we can hear you.

Okay, that's great. Sorry about this. Hope you are all doing very well. Thanks for the time. Look, I have a couple of questions, if I may. Could you help us maybe better understand the magnitude of the weakness in the short cycle parts of the portfolio? If there's any way you could quantify by how much these short cycle businesses were down in the quarter. That's question number one. And question number two is about the distribution solutions business. Could you elaborate a bit more on the turnaround of this segment? I think margins were close to 10% in the second half of last year. Where do you stand now? And do you think the turnaround is essentially completed now? Thanks very much.

Yeah, absolutely. We'll talk about DS because it's one of the highlights, I would say, of the quarter. But let's start a little bit on the order. And you've seen it's up 2 percent, but it's... As you can see on the base orders, down 6%. And I think it's quite clear that the driving force in our order book today is related to energy transition, where ABB is doing a good job, a lot of good projects, and we're seeing good and large investments within this. And that's what we are benefiting from. Would you like to mention anything else there on the short cycle or the base orders?

Just a little bit on the sort of divisional mix because it's not like all the divisions which are not part of this let's call it medium voltage trend which as Björn said is really really strong so On these medium voltage type of divisions, smart, sorry, DS, electrification service, system drive service, we are seeing kind of like a little over 20% order growth. So that's kind of like on the other side and very, very healthy actually performance overall. I mean, Björn, I'm sure comes back to the DS topic. Then when you look at short cycle, it is really in the divisions which are more impacted by the lower growth in the resi construction and now as we said a little bit in the commercial construction like smart buildings also in drive products which is a lot of HVAC which goes to construction but then there are like smart power you would think that that is a short cycle as well that actually is performing well when we look at sort of first half or Q2 so again it's a little bit more nuanced than just saying you know everything would be sort of down.

So let me talk a little bit about DES, because I think this is really fun to see. You know that during the second half of 2022, we changed the management. So we have a new division president for the division. And we did some changes. We moved some of these departments. low voltage switchgear over to smart power because smart power, all the components are actually ending up into the switchgear. So today, DES is very much focusing on the medium voltage switchgear. And, of course, you've seen an enormous drive here because of the project. So I think they have got the act together. We've seen the margin increase going quite well, really well, actually, for this business. And also the... What we say, the left, what's in the low voltage side in North America is improving, even if it's not good enough yet. But it is moving in the right way. But it really drives, DS is really a drive of the strong medium voltage side, which is actually, you know, the big infrastructures on the transition. So well positioned there. Yeah, I think that pretty much completes it.

Okay.

What sort of margins are we seeing now for DS?

DS is above 10%. So that is the good. I mean, we can say that, you know, when we look at our medium voltage portfolio, that it's over 15%. And I think that is the good stuff. We see good growth in a good margin business.

And there we move on to the next. Thank you very much. Thank you. We move on to Daniela. Daniela, your line is open.

Hi, good morning. Thank you for taking my question. I will keep it to one and ask you actually a follow-up to the comments you gave on Q2. You gave a lot of detail regarding what you saw in short cycle, but trying to understand a little bit better on the guidance and why you didn't raise the organic sales growth guidance. You've clearly done better now than the 10%. You have a 65%, I think, of backlog to sales ratios, so high visibility for later, and you're positive on the non-short cycle part. So can you walk us through what are you factoring in in terms of Outlook? How cautious are you being? Maybe break it in volume and pricing if possible. if there's any explanation there. Thank you.

Yeah, no, we expect to continue to see good deliveries. I mean, you see in our order book, it's very healthy. It's 21.9 billion. So we will, during the next 12 months, be fully occupied or delivering out from the order book. So, yeah, we will see good growth also in third and fourth quarter. So I can say that. Yeah, we say at least 10%, but at least can be, of course, higher also. things moving out there. Yeah.

Yeah, maybe just add a couple of data points sort of on the second half overall dynamics. As Björn said, we would expect to see revenue growth in Q4 as well and also margin accretion year on year on Q4. And then for Q3, we are As we see the situation now, expecting a positive book to build, which would lead to a positive book to build for the year, naturally, because we are so far on the year. And then one thing which, of course, impacts revenue is the pricing. And you saw that we had strong pricing. We would expect that carryover to continue. So maybe somewhere three, four percent even could be for the latter part of the year.

Thanks Daniela. I actually continue with the on the pricing topic because I had one of those questions coming through here online and the question is how much of your comparable growth was price and volume in Q2?

Yeah, I mean, it is 5% in the quarter, and three of those is carryover from last year and two of these. So we are quite happy that our businesses are actually keeping up the pricing also during this year.

maybe on the price volume split so it's about if you go sort of dollar numbers about 380 million i think is coming from price so that pretty much covers all the cost increase and then on volume we had about 240 million so the drop through is actually really really nice this time in all business areas when we look at the operating leverage

And I think it's nice to add also that out of that 5% price, three of it was carryover.

Yeah, that's true. And two is actually coming from this year.

Yeah. And with that, we move on to take the next question. Sebastian from RBC, your line is open, I hope.

Everyone. Hi. I have a question regarding... Businesses that don't perform so well. So maybe one comment on the acid pot engine business and generally large engine business. Do you see any restructuring need or do you at least face some low capacity utilization in any of these?

Yeah, I can talk a little bit about this on the ACIPOD, where we, you know, have a fantastic strong market position. But we also had a very strong position for the ACIPOD in Russia doing many of these so-called LNG icebreaking vessels, which we, of course, taken out of our order book. So, yeah, we have a reasonable order backlog in ACIPODs, but we do expect that as orders are coming now in for cruising ships going forward, but also other special vessels, we do expect that this will continue to grow during this year and deliveries in coming years. So we said that we, you know, on the marine side, we accept that it is a little bit softer this year compared to last year. But as you can see, rest of the businesses in process automation is actually covering up very well.

I think the second part of the question referred to large motors and there must be a bit of a misunderstanding here because there we actually are seeing a very strong order growth and also a lot of good actions on self-help so significantly improved profitability in large motors. I mean large motors is part of this medium voltage trend. I'm sorry I forgot to mention that division in the previous answer but that business is actually doing well at the moment.

I think this is actually well worth to notice that this was during last year really one of our problem divisions, but they've done a tremendous job during end of last year and beginning of this year. And today we see very healthy profitability also in the large motor. So well done by the team.

Okay. Very good. And just as a follow up, any divisions where you see underutilization at this point in time where you think, oh, we might have to do something, maybe short-time labor or anything, maybe the short-cycle business, or is this all still doing well and fine?

You know, I think overall, as you know, we have a very healthy order book. So I think they all are quite busy on delivering for the next 12 months or so. Everything depends on how the future goes. But, you know, with our operating model, the divisions are fully accountable. So if there is one division seeing softer demand in certain parts of the world, they automatically adapt their orders. their suit in relation to that part. So that goes quite seamless today. We won't run any central kind of thing. So, you know, we've seen in some businesses have in certain parts of the world done some adjustments. And I think they, I mean, let me take just one example, and that is smart building. they have had you know for a year a much softer residential building area and they have adopted their personnel and their cost structure to these and they actually deliver a very healthy margin even though there is a softer market so it's it's impressive okay now sebastian i will stop you to move on to the next caller which is alex at bank of america merlidge alex are you with us on the call

I hope so. Good morning, everyone. Thanks very much for taking the call. I wondered if I could just dig into your base order comments a little bit, just to make sure we understand the trends. I think if I'm right in my memory, you were up about 3% in Q1, so it was a pretty material decline Q1Q. And I wonder if you might be able to give us a sense of the pricing. Is it the same sort of pricing tailwinds in the base order business? And whether or not you can sort of point on differences and whether exactly whether or what exactly we're seeing that's driving that queue-on-queue weakness. Is that the commercial construction industry? weakness that you call that in Europe, or is it probably getting weaker? Thank you very much.

I didn't quite get the last question.

That was about the commercial construction that we now see softening up in China and Europe.

Yeah, okay. So thanks, Alex. I guess the first question was in this base order dynamic. So yes, it went down a bit sequentially and it is driven by these areas which I mentioned earlier and which Björn spoke about as well about i.e. smart buildings a little bit on the dry products a little bit also on the lower voltage motors while large motors are doing really well on the orders. Now when we look forward on the base orders if I just look at the whole second half And of course, the comps are getting easier here. We would actually for the full second half. I'm not saying how this would sort of pan out quarter three, quarter four. But for the full second half, we would actually expect a little bit base order growth again. So in that sense, that also kind of like gives you a picture that this is a little bit more nuanced. And then on the on the construction side. So, yes, we are seeing a little bit more. weakness also on commercial construction. We mentioned China and Germany, while U.S. continues to be actually strong also on that area. And maybe just on these overall numbers that on EL business, I think we spoke about that earlier also, about 15%, maybe a little bit less than that is actually residential construction. And then commercial is maybe, you know, 20 or something like that. So just that you get the feeler. very difficult to call when this would sort of start to turn. But I think we have a lot of other stuff, as Björn also discussed, where we have a, you know, solid growth on orders expected.

Okay, great. Thank you.

Thanks, Alex. And the next on the line is Andy at JP Morgan. Your line is open.

Hi, good morning. It's Andy from Jeff Morgan. I wanted to ask around the China de-stocking, I guess, dynamics that you've discussed. I guess I'm interested by the comment around expected to persist in the Q3 and whether that's expected to persist in the Q3 but improve in the Q4 or whether... the visibility doesn't really allow you to make a longer-term comment. And I guess associated with that is any impact that you're seeing on pricing in that market as a result of the destocking. Thank you.

Good, thank you. I think when you come to China, you see that in the quarter was actually down 9%. But if you actually lift out the robotic part of that business, it's actually flat. So this shows that the other businesses are actually quite healthy at the moment. Yeah, I mean, we've heard about China. When we were coming into the year, we maybe had expected some of recovery from after the COVID, which has not occurred, which has been pretty clear recently. On the other hand, China is a big market. You have a GDP growth between 5% and 6%. We know that the government is keen to drive the GDP towards 6%. So we do expect that there will be certain activities to drive better demand in the market. On the other hand, I think it's important to know that it's not that investments have stopped in Asia. because even if they're being a little bit more careful, and probably a lot of companies that are, you know, being a little bit careful when it comes to investment, then now we see a good increase in other markets, like India, for instance, where we see good, healthy growth. We saw it last quarter, we continue, we've seen it the last five years. So it's actually becoming a bigger part of ABB. So we think that other markets will pick up some of that, maybe... growth that could have come to China. So I think it will be Asia will continue to be an important and strong market in our belief. Anything you'd like to add on that, Timo?

Well, if we want to sort of go to the China robotics dynamics, which you also mentioned, where we mentioned this destocking. So, yeah, we said that it would continue to Q3. Very difficult to call sort of how it would go from there onwards.

Yeah, but I'd just like to say on the robotic business, we think robotic is a very healthy business. I've said it's in about 15% and it's a growth of 10%. This is actually what we expect in the coming years, CAGR of around 10% per year. So that can be temporary, maybe a little bit slower, but we are quite optimistic of this business going forward.

Okay, let's do a question here from the online option, and it comes from Jonathan at Exane BNP Paribas, and it's on the e-mobility topic. He says that I understand it is accelerating process of product revamp. Why is this needed? And how long will it take to get the business back on track? And also, will you then return to the plan to list it?

I think that first we can talk a little bit about the immobility, because you can, of course, see that it's a disappointing part in our results. And we have during the quarter a change management. So we have new management in place. They have reworked the strategy a little bit more, a little bit more focused product strategy, which have resulted in that we have taken some provision of some immobility. of some inventory, which is affecting the quarter quite negatively. On the other hand, we also seen in certain markets like Germany, where some of the subsidiaries for this kind of equipment have stopped. And that have had, from short-term perspective, some effect. On the other hand, we saw good growth because we had 75% up in order. So it continues, of course, to grow strongly. But we have things that we must... fix inside the company. And I think the new management has made a good plan on that. And I think it will take until the end of the year before we are on track with that business. We have taken in private placement, so we have 525 million in cash to this business. So we have sufficient cash to grow this business and continue to develop in the near future. So the strategy has not changed, but we need to make sure that the business is in good fit and that, of course, the financial markets are healthy when it's time to do it. But it's no hurry.

Okay. And then we take a question from James at Redburn. Your line is open, I hope, James.

Hi, John. Morning. I hope you're all well. Can I clarify the answer to Gail's question, please, on the DS margin? I think you said it's about 10 now. I wonder what you thought the potential future is for that. But my real question is on the robotics and automation business. Minus 22 of orders. Could you scale how much was robotics versus B&R? And specifically, I'm trying to get to pure robotics China, how much it was down, and really why you think we've had this destocking. I got the sense that there was a big EV battery capex cycle that might have unwound a bit. Do you think it's that? And I don't really understand, because it's a direct business that goes direct to OEMs, why they would have stock of unprogrammed robots. It's not a distribution business. So maybe just some understanding on how it works.

Let's start with robotics a little bit. You probably remember last year when we had big challenges on the semiconductors and deliveries of robotics. A lot of orders were placed during this period. During the year, the supply chain has eased up and we now deliver full out. And you saw also good growth in revenues from the robotics. So that has been. So many customers that previous year put up. A lot of orders have not done this year because they are getting deliveries from that. Then there is a softening on the robotic business, which we believe is temporary because, you know, China is today 50 percent of the world market for robotics. So we do believe that that will continue to drive going forward. But for the moment, and we said for this quarter, we saw weaker, of course, and we also believe that it will stay weak next quarter. And then it's a little bit, we'll see how it will be in the fourth quarter, if we will see some pickup again, which we actually believe. But the underlying robot market is healthy, and we do believe that robotics and robotics Our position is quite strong. We are a clear number two in the market, and we believe that we have a good chance to deliver good performance there. But there is some destocking, and that is more related to these installation companies. You know, they are buying from us. So it is a direct business, but it is done mostly through these installation companies who are making the final, let's say, solution for the end user. So that's where the talking is taking place. On the DES, I mentioned that the DES is a healthy margin business. We are seeing DES moving towards the 15%. I think that is... It's good to see, and my worries about this division is actually gone. I think we have strong management in place. They're taking the right action, and we're seeing very quick improvement, supported by good order book with healthy margin. We can look at all our businesses, and we have a strong focus on gross profit. You've seen for the group, almost the whole improvement of our EBITDA margin, operation EBITDA margin, is driven by improved gross margin. And the good thing is that all our businesses have a strong order gross margin and also order book gross margin, which also will secure... good margins also in their business going forward. So DES has gone out of this transition side. Of course, we can do a little bit on profitability. There are certain amounts in U.S. where they can become a little bit better, but I think overall it's becoming quite a healthy division, which is reflecting on the electrification business, as you see, reaching 21% profitability for the quarter. which is, I think, definitely in line or better than any of our competitors in the market. That's great. Thanks. Thanks.

Thanks, James. And we move to Will and open up your line.

Good morning. Thank you for taking the question. It's Will at Kepler. So my question would be, I think earlier today you indicated that divisional performance in 70% of the divisions is in a growth phase. suggesting five or six below target. Maybe my question would be identifying where the upside opportunity is from the continued turnaround of the businesses still in repair mode but more specifically could you talk about the success in measurement and analytics and whether that is now above the overall process segment and also the opportunity and how it continues within large motors and generators and lastly you know drives is you know can drives continue to expand margin it must be well above the business area average thank you

Thank you. I understand the questions are very much related to the businesses which were underperforming. I think we've seen that this quarter many of these businesses have improved dramatically. Very much is related to healthy order book also on the medium voltage part of the business, which is system drives. It is large motors and generators with healthy margin. I think that's really nice to see. And it is also the DS business there. So that's being supported well. And as I mentioned, this business now is actually running at 16 percent margin. So above what is the 15 target that we have set for that. So that's quite healthy. Yeah, but... You know, this quarter that more or less all our divisions were actually delivering a good performance. And yes, I like to underline the measurement and analytics. You know, this for a couple of years ago was one of our crisis business. We got new management in place. They put a new structure into that, a decentralized one with a very strong focus, both on the instrumentation, but also on the analytics, which was healthy from the beginning. And even if I wouldn't say it, but the businesses delivered over 20 percent margin during this quarter. So I'm very happy for them and they have done a fantastic job. So it's quite remarkable. So I would say that this quarter, more or less every division delivered margin. Of course, there are some that need to focus a little bit, but it's not enough that you do one quarter on this level. It means also you have a sustainable performance on this level to be upgraded towards growth. But if we run it like we've been doing today, more or less all our division would have been in a growth mode. So I think we have a good potential if they continue to deliver up to that. There are some, of course, divisions that are over-delivering margin also, which you said, maybe some of them that could be difficult to keep on the level where they are. We still believe that these are healthy businesses and will continue to deliver, and they should be focusing on growth. And that's, of course, we want to grow ABB. And these best-performing companies, we want them to grow fastest.

yeah i think yeah it it's going to keep up on on a good level both for the group and for the individual businesses okay thanks will and then we moved to martin wilkie at city just just one question for me you've called out uh data centers as being positive orders in And just to understand, even though there's lots of talk about how artificial intelligence can drive data-tested growth over time, what you saw in the quarter, given that that's also a market that had a very good year last year, and therefore we could have expected some slowing, just to understand what you're seeing in data temperatures. Thank you.

Data center is an important segment for us, not only in electrification, also in the motion business which we're driving. Today we are close to 1.3 billion in size of what we are supplying into the data centers, and we're seeing a good double-digit growth in this business, and we believe that it will continue. So we actually have a lot of products and solutions and services that we deliver today. You want to add something?

Well, maybe just when you mentioned the motion. So there is, of course, a lot of cooling going on. And for example, these new products on this sort of combined motor drive is something which is definitely a data center specific product. So as Björn said, this is really not only coming from electrification, but it's really a broader offering. Also, some of these bigger data centers can also need automation for the whole electrification piece.

Okay. Are you overweight larger data centers? And that's perhaps driving the growth. Are you more exposed to hyperscale or more broadly spread across the different sizes?

You know, I think we are both small and hyperscale. So we are in many of them. But for us, this is healthy business. So it is not margin-pressed business for us. We are delivering a good margin to this industry.

And there, I'm going to stop you, Martin. Maybe this time we'll actually squeeze all in if we stay disciplined for the remaining few minutes. Guillermo, you're next in line, please.

Good morning, everyone. Thank you, Anssi. Thanks, Timo Bjorn. Maybe first question to Timo. I think I heard your comments for industrial automation, for personal automation when it comes to The margin development, you said sequentially the margins will be down. But typically, actually, Q3 tends to be above Q2 seasonally. So I was wondering whether you could clarify or give some color on that. And then I have a second question, maybe to Bjorn. I stay back and then I ask later.

Yeah. Yeah. So I think we said also, depending on mix, as Bjorn said, there were some very, very high margin performance. So we had super mix now in PA. Let's see how it moves forward. Also, you mentioned that there could be more volume leverage, you know, as you see from our revenue commentary and you look at the previous kind of like comparable revenue, maybe it could be even a bit down, so maybe a bit less volume leverage. But of course, we expect healthy performance in process automation for Q3. But those are the sort of puts and takes.

Thanks. And then maybe to Bjorn or Timo, regarding the sub-segments of process automation, LNG and electrification was one of the key segments or two of the key segments driving growth. And I wonder whether you could clarify or give some color on how those verticals are progressing in terms of tendering activity and demand.

Yeah, I think the underlying, the process automation is in a very good spot. And it's driven by a lot of this transition that I talked about towards sustainability. So a lot of these projects are being done. I mean, we have it in new green technologies like hydrogen, in batteries, in gas. LNG terminals, liquefaction and so on. So there is a lot of activities. And of course, it can be a little bit bumpy between the different quarters. And I think it was only 6% this, but we had a huge growth in the last quarter. And we believe that it will continue to grow very well because there are so many exciting projects in this area where we are well positioned. So, it's actually both energy security side as well as this energy transition where we are benefiting at the moment. So, we are optimistic about it. And the good thing is, and the only way that we can, of course, look at the expectation for the future is that we see that the order book is quite healthy when it comes to gross margin.

Thank you, Guillermo. And we open up for Alessandro at Octavian. If you're still with us, Alessandro. Yes, thank you.

Hello. Can you hear me?

Yes, we can hear you. Yes.

Great. Thank you very much for the time. I have a question on the outlook of the economic cycle last year. We were talking a lot about recession. You mentioned that you have some scenarios, good trend or, let's say, bad or worse or whatever. Can you give an update there what you are doing, if you have upgraded them, what kind of contingent measures you have in the drawers? And also, if you have some sort of rock-bottom levels for the margin, that you would expect the division to deliver in case of a downturn?

Thank you for the question. I think it's good. Yeah, it's quite comic in a way. I mean, when we were standing here 12 months ago, we were all saying now the downturn is going to come and we have done a scenario planning with our division so they're well prepared. We were a little bit wrong at that time and it's been quite a healthy... year when we see from orders and you of course see our order book has grown even further compared to before and also now with good deliveries and we've seen really healthy growth for our businesses. So today we have even a bigger order book than we had a year ago. Of course, when you look forward, there are clouds in the market. That is pretty clear. We hear about China, all these things. So, yes, our divisions have updated all their contingency plans. This is part of how you run a division today. So we ask them to look over different kind of scenarios. So some of the divisions might get some headwind and some of them will continue to grow fast. So there will be different actions in different divisions. And certain divisions are more resilient than others. And that's what they need to work with. This is actually part of the way they drive their businesses going forward. But You know, I think the order book gives a certain amount of security for deliveries during the next 12 months. But, of course, you never know. We always plan for the worst and hope for the best. And we let the businesses do what they can. And so far, they have surprised us during the last four quarters. And we'll see how the future will be.

Okay, and we'll finish off with a, I guess, a favorite topic for you, Timo. We'll end up on the cash topic. And Ben from Morgan Stanley is asking about the network and capital development in the quarter and also how you see that pan out for the rest of the year and the implications that may happen.

I think that was an expected question.

Yeah. Thanks for the question. So yeah, it's true that we tied a little bit of networking capital, but actually when we then look at the components, so actually if you look at receivables, they have grown exactly in line with revenues. And when we look at inventory, it actually is exactly in line with the order backlog and actually inventory to order backlog ratio continues to go down a bit. So it was at tops 30, now it's 28. So we are not seeing any sort of surprising dynamics and we expect that this will now start to improve going into the latter part of the year. So we spoke about this earlier. If we would get to those sort of 11, 10 percent levels, let's see how it goes to revenue and networking capital, then we should have a free cash flow, which is sort of surprising. They're about close to three billion or two point high something. We'll see how it sort of comes through. But there is no sort of issue in those numbers at all. And we expect the strongest performance for the year.

Thank you. And that rounds off today's session. Thanks for spending the time with us. And we wish you a nice summer break if and when you get there.

Thank you. Thank you.