ABB Ltd

Greetings to you all, and nice to connect again as I welcome you to this presentation where we will talk through ABB's results for the third quarter. For those of you who don't know me, I'm Ann-Sofie Nord, Head of Investor Relations, and next to me here, I have our CEO, Björn Rosengren, and our CFO, Timo Hjelmutila. They will take you through the presentation, and then we open up for questions. But before we begin, I should mention the information regarding 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. But with that said, we move to the presentation and I hand over to you, Björn, to kick it off.

Thank you, Ansi, and a warm welcome from me as well. The third quarter was strong for us. As I go through the P&L, we improved on virtually every line, on absolute number as well as margins. And I'm especially pleased about the strong cash flow. This was key focus area going into this quarter. And we improved conversion and generated a record high cash flow of $1.4 billion. A good outcome. From a market perspective, it was good to see another quarter where we increased comparable orders. If we look under the surface, it was a mixed bag of drivers. Like in the previous quarter, business was good for project and system offerings. And this more than offset the weakness we saw in parts of the short cycle business. Overall, we improved comparable orders by 2%, and we delivered on our expectation of reaching a positive book-to-bill. I'm pleased about the margin being above 17% again. In my view, this is a strong operational performance, and I think it shows that we are a more efficient and well-tuned unit. During the quarter, we recognized for our sustainability standards. Sustainability is embedded in everything we do. It drives demand for our products, it impacts how we produce, it impacts how we act. So, I was pleased to see this being recognized by the MSCI, who upgraded ABB to the highest ESG rating at AAA. This puts us in the top 10% of the peers universe. A good achievement by the team. Now let's tune to page four for some more detailed comments on the market development during the third quarter. I mentioned earlier that there was a mixed bag of demand drivers. I briefly mentioned that we see continued positive demand linked to the medium voltage business. This reflects high activity in the traditional process industry segments like oil and gas and chemicals, but also in growing low carbon segments like LNG and hydrogen, as well as the marine segment. On the softer side, there was weakness in part of the short cycle business. The construction segment continues to be weak. Demand in residential construction dropped in all regions. But in commercial building, it was more split picture. US continues to be robust, China weak and Europe holding steady. Orders were significantly down in discrete automation. Customers continue to normalize order patterns after pre-ordering in the period of supply chain constraints. This means our machine automation divisions will continue to deliver from its order backlog, which stretched as far as into the second half of next year. In the robotic business, the automotive segment was positive, supported by EV investment. However, general industry and consumer related segments declined due to significant drop in China. This includes a softening underlying market, but also channel partners adjusting their inventory levels. We expect China to be a challenging robotic market also the next couple of quarters. Revenues were strong at close to 8 billion, and all business areas contributed to a comparable growth of 11%. On a positive book-to-bill, the order backlog remains strong at about 21 billion. This supports our revenues going into 2024. Now let's turn to slide five and look at the market patterns from a geographical perspective. On this side, you see the positive development in the Americas and AMEA. Americas was the growth engine, and comparable orders were up by 13%, with continued good development in the United States. Total AMEA grew by 4%, as a slight decline in China was more than offset by strengths in, for example, India. During this quarter, we have received lots of questions on the China market. Our orders in China declined by 3%, but actually three out of four business areas reported stable or positive comparable growth. It may be a timing impact and it's early days, but it seems like there was a sequential stabilization towards the latter part of the quarter. outside the robotic and construction business. Europe declined by 13%, impacted by the high comparables and the weakness in discrete automation. Now let's turn to slide six and our earnings outcome. The chart shows our strong improvement in both earnings and margin. Operational EBITDA was up by 13%. Our strong operational result more than offset the impact from divesting the acceleron and the power conversion divisions. We improved the margin by 80 basic points to 17.4%. This includes a combined negative impact of about 60 basic points from the spin-off of Excelleron and the settlement of an insurance claim which supported last year's result. It is good to see how the strong revenues growth feeds into a sharp improvement of the gross margin. Higher volumes improved cost observation in production. And pricing was up by about 4%. In total, we improved the gross margin by 120 basic points to 34.7%. In total, this was one of ABB's strongest earnings and margin quarters ever. I would say we are on a good path. With that, I hand over to Timo.

Thank you, Björn, and greetings from my side as well. So let's start with electrification on slide seven. Electrification saw another quarter of strong demand surrounding our medium voltage offerings. From growth perspective, the strength in these areas more than offset the softness in some of our short cycle businesses. This sums up to a comparable order growth of 1% and B2B above 1%. Particular strength was noted in the data center segment, with high customer activity linked to the increased data processing needs of AI. Other positive segments were oil and gas, including orders related to low carbon LNG, as well as green energy, solar and immobility segment in rail. On the downside, we saw continued weak demand in the construction segment, also impacted by customers adjusting inventories. Looking specifically at residential construction, we saw weak demand across the regions, impacting primarily smart buildings and to some extent also installation products divisions. For commercial construction, the US showed good momentum. Europe hovered largely flat from last year, and China was the weak area. Now, looking at the chart in the middle, comparable revenues grew by 6%. This was driven mainly by strong price contribution as distribution solutions and smart power executed on their order backlogs, as well as positive development in the tightly linked service business. It's great to see electrification deliver another 20-plus margin quarter. Operational EBITDA margin was 20.8%. This reflects a strong improvement of 210 basis points from last year, with the main drivers being strong pricing as well as support from higher volumes. Margin improved in most divisions, and it's really nice to see distribution solutions performing so well on the back of its focused profitability efforts. All in all, another strong quarter for electrification. Looking ahead into the fourth quarter, we currently expect a growth rate in comparable revenues to be similar to what we saw in Q3 and the operational EBITDA margin to be sequentially lower in line with historical pattern. Let's move to slide eight and the motion business area, which also had an excellent execution. Comparable orders declined by 7% from last year's high level. That said, if you look beyond the impact from large orders, order intake remained broadly stable. Similar to what we saw in EL, also Motion noted the pattern of strength in the long cycle versus weakness in parts of its short cycle offering. From a segment view, this meant that customer activity was high in the process-related areas of chemicals, oil and gas, pulp and paper and mining. Declines were noted in the electronics segment as well as HVAC linked to soft construction markets. Revenues were up by 11%, marking a fifth consecutive quarter with double digit growth in the business area. Total revenues reached $1.9 billion and were supported by increases in both volumes and price. The team has done a good job at executing on their order backlog and delivered revenue growth in all three regions. It was good to see motions operational EBITDA margin reaching a high 19.8%, up 200 basis points from last year. This was driven by an efficient execution of higher volumes, but also by previously implemented price increases, which more than offset the negative impacts from labor inflation and higher input costs. The strongest profitability improvements came from the motors divisions with the large motors and generators division as the clear outperformer. Looking ahead into the fourth quarter, we anticipate absolute revenues to be broadly similar to the Q3 level and the historical pattern of a sequentially lower margin to repeat. Then turning to slide nine and process automation, where the underlying customer activity was robust across most segments. Orders came in at $1.9 billion and were up as much as 38% on a comparable basis. This includes the added support from a large order of about 285 million. For this one, I think it's worth mentioning that the revenues will be generated across a multi-year period as we gradually fulfill the agreement. Segments to highlight on a positive note was oil and gas, where we saw good activity in the US. Marine demand was also strong, but we also saw good momentum in the low carbon related areas such as LNG, hydrogen and carbon capture. Comparable revenues were up by 23% with strong double digit increases in all divisions. Growth was supported mainly by volumes, but also by a positive price development. It was another good margin quarter for process automation, achieving an operational EBITDA margin of 14.6%. I say this even though the margin declined 70 basis points from last year. And I want to remind you that last year, PA had about 190 basis points support from the now exited Acceleron business. So they are clearly improving the underlying margin nicely year on year. Most divisions contributed to the underlying improvement on the back of better project execution and continued benefits from delivering higher volumes from the backlog with improved gross margin. The Marine and Ports Division remains impacted by adverse mix due to lower Arctic marine propulsion business. Looking at our expectations for the fourth quarter, we foresee a mid single digit growth rate for comparable revenues and the operational EBITDA margin to be slightly up from the Q3 level. On slide 10, we turn to robotics and discrete automation. On the back of declines in both divisions, orders in RA dropped by 27% on comparable basis. However, to understand the market dynamics, we need to look at the robotics and machine builder segments separately. The robotics division posted a mid single digit decline in orders. This was primarily driven by a sequential weakening of the China market. On top of that, further pressure to demand stemmed from inventory reductions among channel partners. These pressures in China are expected to continue for the next couple of quarters, putting pressure on the book and bill business. Outside of China, robotics demand was more resilient. Europe declined somewhat, but nothing like what we saw in China, and there was growth in both the US and other AMEA markets. In total, the positive momentum we saw in automotive triggered by EV investments was more than offset by general softness in other segments. Now turning to the machine builder segment. The team is working hard to reduce the order backlog that extends into second half of next year. As a result, we were able to communicate to customers that delivery lead times are gradually coming down, which triggered further normalization of order patterns. Similar to the robotic segments, this normalization is expected to continue for the next couple of quarters. Now moving to revenues, RA achieved a 9% comparable revenue growth. Execution of the high order backlog triggered strong growth in Europe and the Americas, which was further helped by earlier implemented price increases. Growth in the other AMEA markets did not offset the book and build weakness in China. We saw double digit revenue growth in machine automation, helped by good backlog execution. Turning to the margin, robotics and discrete automation delivered a solid 190 basis points improvement from last year, reaching 14.7%. Benefits from strong price management and improved operational efficiencies, more than offsetting labor inflation and slightly higher R&D investments. For the fourth quarter, we expect a slight negative growth in comparable revenues on the back of continued weakness in the Chinese book and bill robotics business, which most likely also will put some sequential pressure on 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 with the price impact at about 4% and leverage on higher volumes more than offset the adverse effects from cost inflation. All in all, a 13% improvement in operational EBITDA with an 80 basis points reported margin increase. This does not take into account the adverse impact of 30 basis points from the divested accelerant business, as well as 30 basis points from the insurance claim, which both benefited last year's margin. And now let's move to cash flow on slide 12. Some of you may recall Björn challenging me on this topic when we met here in Q2. I dare to say that the ABB teams rose to the occasion. Cash was stellar in the quarter with cash flow from operating activities reaching $1.4 billion, a record high quarterly level. The increase from last year was $560 million, supported by all business areas and driven by higher earnings and a reduction of networking capital. It was good to see that the teams were able to slightly work down the inventory balance during the quarter compared to the buildup we had last year. The positive impact from inventories was partially offset by higher trade receivables and contract assets and liabilities, which is linked to the higher revenue growth. Continued reduction in net working capital should support a strong cash flow also in the fourth quarter. And I expect us to achieve an annual free cash flow of about $3 billion for the full year. And with that, let me hand over to Björn to round off this presentation.

Thank you, Timo. Let's finish off with slide 13 and some outlook comments. As we approach the end of the year, we fine-tune our growth guidance for comparable revenues in 2023 to be in the low teens. And we expect the operational EBITDA margin to be in the range of 16.5 to 17%. For the fourth quarter, we anticipate a low- to mid-single-digit growth in comparable revenues. Those of you who know us well are familiar with our historical pattern, which shows that the fourth quarter tends to a somewhat softer margin. Consequently, we expect the operational EBITDA margin to be around 16% in Q4. With that said, let's open up for questions. Hansi.

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 to secure the sound quality, may I just remind you to mute the webcast as your line is open for questions. But you can also put the questions through the online tool in the webcast. This should now be visible in the bottom right corner of the screen. 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. And with that said, we'll kick off with the first question. And today we'll start off with a question from the online tool, and it comes from Daniela at Goldman Sachs. And two questions. So I'll take one and then get back in line just to stick to the rules. And we start with this. Maybe this is for you, Björn. What is your level of confidence on process automation trends beyond the large orders this quarter and going into 2024?

Thank you, Daniela. Yeah, my confidence in process automation, and I think I've been expressing that pretty clear, it's quite high. And I'm really glad that we have the process automation that is taking major step in in the transformation the green transformation that's taking place so it's actually two things it is also the base industry that secures the energy side and then you have new projects for it and as you could see for the quarter we had a huge growth a lot driven by a large project which is of course the basis for this business but we also have an underlying service business which is about 50% of that business. And we saw actually double-digit growth in that business also. So it's very, very good. And I think going forward into next quarter and to the future, these are many of these transformational... steps that need to be taken i'm just referring to certain segments you have the hydrogen you have the batteries you have the mining market you have the green steel all of this that is taking place now is actually the customer segment for process automation so what i've been saying for a long time i think we are well positioned with the pa also to see growth in in the coming quarters

Okay, thank you. And then we'll take the first question from the conference call and we open up the line for Alex at Bank of America Merrill Lynch. Are you with us, Alex?

I am indeed, yeah. Thanks very much, Ansi. Good morning, Björn. Good morning, Timo. Good morning. A question for Timo, I guess. Just on your free cash guide of 3 billion, obviously it implies a bit of a step down in Q4. I wondered if you could just help us understand the moving parts there and why the Perhaps if I might be permitted to describe it as caution on that.

Thank you. Okay, sure. Thanks for the question. Yeah, I kind of know where you are maybe coming from. So we are close to 2 billion free cash flow by now, first three quarters. And if you look at sort of how the operating cash should come in, then it of course depends on the networking capital reduction. And we had 12.8% networking capital to revenue uh at the end of q3 and if that would go down say a point point and a half we should kind of be there okay i understand our history has been that it's gone down from q3 to q4 sometimes even two points so yeah there is also a scenario where it could be a bit higher but you know let's see how it comes through but but it's uh the three billion is uh it's a new level of Three billion is definitely a new level. That's great.

Okay. Thank you. Thanks, Alex. We'll take the next question from Will at Cap de Chavre. Are you there, Will?

Yes. Good morning to you all. Thank you very much for the time. My question would be directed at your sense of the distributor trends that you see across the various businesses that are most relevant for distribution solutions, smart power and smart buildings. Could you perhaps provide a little more indication of or color on how you see distributor stock levels and how you see the differences between regions? Thank you.

Yeah, thanks, Will. Maybe I'll go for it. I wasn't sure if this was like electrification only question or broader, but let's go with electrification first. So we called out today that we have seen some inventory deductions impacting this quarter's numbers. Regarding electrification overall, we think this is now pretty much done and we should be sort of on normalized stock levels with distributors. Now, there can be maybe some pockets here and there which are related to residential constructions where some of this could still be happening. But let's remember that residential construction is only about 15% of the electrification business. And then if you look at some of the other business areas, there could still be some destocking happening in construction related stuff in the US, which is HVAC related in motion for us. So, say, HVAC-related drives and NEMA motors, but not a lot. And then, as we called out, the biggest parties in robotics in China, where this probably still could take a quarter or two to flash out.

Thank you. Thanks, Will. And we'll move on to the next question in line on the conference call, which would be Gail de Bray, Deutsche Bank.

Can you hear me now?

We can hear you now.

Oh, that's great. Can I have some kind of clarification on your statement that this talking and ordered normalization should continue into the next couple of quarters in robotics and discrete? I mean, do you see some sort of bottoming out this quarter, or do you actually expect orders to trend further down sequentially in Q4 and Q1, and specifically in China. I think you also said in the press release that you noted some indications of the underlying Chinese market stabilizing. Is it applicable to the discrete automation business? Thanks very much.

Maybe I'll start with the Robotics Channel stuff, as that was sort of related a little bit to the previous question. So at this moment in time, and this is of course difficult to call and it's early in the quarter, but we are not expecting, when you look at the RA orders, further sequential decline on absolute numbers. So that's where we are sitting there. And when you look at the robotics business overall, then if you take the whole picture, actually, as we were down in China in orders quite a bit. On the other hand, we were actually up 6% on the other market. So this is really sort of a bit of a dual situation. And then now I actually forgot what was the other part of the question. So can somebody remind me? You had to kind of like sneaked in there.

The other part was actually around the statement you had in the press release that you noted some signs of stabilization in China. Yeah. And do you want to take that?

I'm just going to say that when you look at China, we were down three percent, which was less than we expected. And of course, less than we saw during the previous quarter. And we can see that three out of four business areas actually showed flat to growth and only one, which was the robotic and discrete automation, which showed weakness in that market. So some some good signals, I think.

Okay, thank you. And... Are you going to sneak a third question in there, Gael?

I think he's going to ask if this is going to continue like this. If this is going to continue like this into Q4.

I think... I promise. It's just the stabilisation. Is it a comment applicable to discrete automation?

Well, if you just take discrete automation, first of all, we are not that big in that. If you put outside robotics in China, that's more a European business for us. So we might not be the right indicator here when you look at this discrete automation. how I would put it. And on that sort of then when you look at the robotics market in China, there's also two parts there. The EV market for EV vehicles is actually going quite strong. And then the other stuff, which is closer to consumer demand, is at the moment a little weaker. But I think what Björn said on the overall sort of stabilization trend on the ABB level should look, you know, what we know now pretty similar also going into Q4.

Thank you very much.

Thank you. And we'll take one question here from the online tool from Phil Buller at Berenberg. He says, where are we on pricing and can that be negative on aggregate in 2024?

I just can mention that the pricing was up 4% for the quarter and I think 3% is coming from last year and 1% up during this period. So it keeps up pretty good. So it's a combination with the improvement of the profitability is pricing and volumes.

And maybe to mention on that topic that actually if you take input cost outside labor, because our pricing went kind of like it was five last quarter, now it was four, but also the input cost actually went down outside labor. So in that sense, it's sort of moving in tandem, if you could say so.

And then we move to the next question and we will open up for Max at Morgan Stanley.

Thank you, and good morning. I just wanted to ask about the America's growth, because you obviously called that out as particularly strong, but I think it contains the large process automation order. So could you just talk about the base business and how that's evolved in the U.S. through the quarter? Thank you.

Yeah, it's correct that the U.S. is driven by large orders, a lot of these transformations, both when it comes to energy security, which is mainly in the LNG, but also in new infrastructure, especially for electrifying America. That's been the driving force. If we're looking just at the short cycle business, it's a small negative on that side.

And I think you call out quite a big decline in the motion division. Maybe what is driving that in the U.S.? ?

Yeah, as I spoke about this earlier a little bit, so it is really relating to these destocking situations in the construction, resi construction mainly, but construction related business. We have a very strong position in HVAC solutions in motion, and that's really one part of it. I don't now remember if we had a stronger comparable last year in the US. It could be that that's driving it as well, but I can sort of check it while we move forward on the call.

Okay, thank you very much.

Thanks, Max. And the next question comes from Sebastian at RBC.

Good morning, everyone. My question relates to the momentum in Europe. You mentioned that Germany was very weak on motion order intake coming from rail. But if you adjust for that, adjust for that weakness, where do you see European growth and were you surprised by that?

Let me talk a little bit. Yeah, what you're seeing a little bit on Germany, which has been the, let's say, the most negative in Europe, which was down 33 percent. We had a huge traction order in Germany last year. So the comparable is quite tough. But even if you take that out, you are on a double digit scale. decline in Germany, which is, of course, also related to the real estate construction business, which is a bigger part of electrification in Germany than we have in any other market. So some effect of that. But I think it's pretty clear Germany is a more challenging part of Europe. If you look, for instance, at the Nordic region, you saw good growth and many of these new transformational projects that are taking place. So many of the base cities are investing heavily. So that's why it's a little bit mixed bag when you see Europe.

Maybe on motion orders overall, just to throw a number in here, so we had minus seven, but if you take the traction division out, the motion is actually pretty much flat or slightly up, like, you know, one point.

Thank you very much.

Thank you. And we open up now for Martin at Citi. Your line should be open, Martin.

Thank you. Good morning. It's Martin at Citi. Just a question on lead times. You've called out in robotics, particularly in machine builders, that you've got shorter lead times. Could you put some numbers on that as to where they've come from and where they're now at? And is that now fully back to normal? So when we think about the lead time contraction and what that does to order phasing, are we kind of now normal or there is still more to go there? Thank you.

No, I think today the order times are short. I mean, it should be in line with that. And as you know, for a little bit over a year ago, it was a totally different situation. So many of the Chinese dealers was actually stocking and that is being destocked now. But I think the robotics business is a little bit of a mixed bag if you look at it globally. And I think Timo said it, but if you look outside China, we actually have 6% growth in the robotics business. So Europe and North America is actually moving quite well. So the weaker market is very much contained to the Chinese market at the moment. We believe that the destocking of our dealers will take a little bit more time before we are there.

I was going to throw in something on the backlog dynamics, because I think that might have been part of the question here as well. So if you look at the robotics and machine automation, the whole business area, It's sitting at the moment at about 2.4 billion backlog. And the backlog before we went into this whole COVID and, you know, this sort of supply constraint stuff and all that was actually about 1.4. So we have about a billion still to work to sort of get into a normal level. So there is some support coming for the coming quarters from the backlog. The backlog is longer in machine automation than robotics, but it's giving a bit of support also to robotics business.

And if we think about the math on that, if we look at your book to build, then the backlog would normalize kind of by next summer. Is that the right way to look at it? If lead times are now normalized and And your historical backlog ratios are kind of where we're going to go back to. Is that the right math to think about when the backlog effectively normalizes?

Yeah, that's kind of like where the math takes you. If you take the current order level of about 670 million and you put it to 900, I mean, we can, of course, pick whatever revenue we want. So that would then be about four quarters. But I've drawn a billion.

I still also want to say that this is a short-term issue because we are very confident about the robotic market going forward. So we do expect that this market is 10% growth over a business cycle. So, you know, we are investing in additional production and development capacity within this business because we think it's hyper interesting for ABB and the future.

Great. Thank you very much. Thanks.

Thanks, Martin. And then we open up the line for James at Redburn. James, are you there?

Yes. Good morning. Good morning. Can you hear me? We can. We hear you well. Just a question on electrification, particularly DS. Can you scale the medium voltage order growth in the quarter and Talk about your visibility to next year for orders. I mean, I ask because this has been a great market for everybody two or three years. And there's two schools of thought. One is, and I know we have 20, 30 years of underinvestment in medium voltage, that we now have to spend a hell of a lot on the automation, the software, moving to power semiconductors. and the electrification of the planet. This is going to be a great decade. It's going to keep on growing. Although it's just the thought that it's cyclical. And I'm just wondering how much... Thanks, James.

Just a little bit on the medium voltage. And when you look at the medium voltage for ABB, it's actually between 20-25% of our total business. So it's a significant part of that. And that is very strong. It's being driven by the whole electrifying the world. where the infrastructure needs to be built out. DES is of course benefiting that, but also on the medium voltage drive business is also a lot. And you maybe recall that when it comes to DES, a year ago from now it was a little bit of a crisis division today it's definitely not a crisis division and of course part of the over 20 percent margin for electrification so you know they are up on about 15 percent so it's a good achievement there if you want to go a little bit into the dynamics in in the growth numbers for ds yeah it's been been sort of

as we know, strong double digit growth in DS. But of course, if you threw in a 10 year sort of storyline there, James, and I really don't have anything to add to what Björn said. I mean, we see this as a strong market going forward as well. I mean, there will be a lot of need for infra on distribution in many ways, both for the industry as well as for uh transport so we see there's a strong market where we continue to invest behind it and we think we can improve performance of that division going forward as well you don't you don't see any sort of signs of cyclical slowing in the tent about you think it can stay as a good market through 24 on orders

Yes, absolutely, because many of these big projects that we are seeing are actually the medium voltage, the core of some of these projects, or the most of these projects, because we're talking high power into, if it's hydrogen, or if it's green steel, or if it's the infrastructure in a mine, and so on. But also the whole electrification when it comes to EV charging, You know, when we talk about EV charging, we normally talk about the charging station. But for ABB, maybe the most or the best part of the business is actually the whole infrastructure that needs to be built up to support all these charging stations everywhere. And there you have medium voltage in large scale.

That's really helpful. Thanks.

Thanks.

Thanks, James. And we go back to Alex at Bank of America Merrill Lynch.

Thanks very much for the follow-up. Yeah, I just wondered if you – we've sort of talked a little bit about robotics and machine automation. I mean, the implied declines in that machine automation business in order intake is significant, if I've got my calculations correct. So I wondered if you can just give us the actual numbers. Timo, sorry.

Yeah, it is significant. Your calculation is correct. No, but you have to really look at this in a way that in machine automation business, which should be sort of delivery times, I don't know, four weeks to 14, 16 weeks type of stuff, we're still working a really long backlog. So even if the order intake at the moment in machine automation is down, you know, double, double digit as you are, correctly pointing out, calculating from the whole robotics. So it's like, you know, 50 or there or there about, you know, broad numbers. But that does not mean that we would not expect that business to perform well going into next year, because a big part of that one billion backlog reduction, which I was talking about, is happening exactly there.

To be adding on this, I think when you talk about our discrete automation, it's very specific. Because we're talking about machine automation, and more or less all our customers in this segment here are OEMs. So we're working closely with these companies, and we are, of course, supplying into their machines. And we do not feel that we have lost market share among these customers. We are still with them. But, of course, when we had huge problems during the last year, many of them placed big orders to secure their own deliveries of their machines. That is, of course, a new situation today, and we are supplying quite well out, and you can... You probably see on the invoicing there. So for them, they can do a big destocking. And today, with the short lead times that you have, they will order when they need. So we are also on the discrete automation, which is very much in line with what you see on the robotics market, and that we do expect a lot of growth in this business in a couple of quarters. Okay. Thank you.

Thanks, Alex. And we have one question remaining from the conference call, and it comes from Sebastian again. Sebastian, your line should be open.

Hi, I have a follow-up question on robotics again. So if China is weak and it's a short cycle that's weak and its inventory adjustments are coming, you could use the robotics from Shanghai, I assume, from your factory there. Could you give us an idea of the backlog of that factory and whether there's a risk that you may have to adjust capacity of that facility in the next six months?

Yeah, I really, I don't know what the backlog of a factory is as a factory, so I can't give any number thing here but i don't think in general of course we want to run a business model where we have as much you know variable cost as possible and and you know of course when the demand changes we will have to in multiple places of abb adjust our manufacturing situation

I think this is one of the strengths of the decentralized model that you have 19 divisions and some of the divisions are in big growth mode and some divisions have a more tougher market. So the one that have a tougher market, they adjust their capacity what they need to and the other one they invest for growth. That's nothing special with them. They will take the measures they need to continue to deliver good margin. But this goes up and down, and we have big confidence that they will adjust those costs in line with the demand. So that's how it works.

As a brief follow-up, are there other business units where you currently see, let's say, Surprisingly low capacity utilization, where you say this might need some work.

No, it's actually only if you very much contain it to China and robotics. If you look at more or less every segment we have and every division, they have a pretty full capacity today in the way they are running.

Yeah, volume actually contributed about 170 million into the margin this quarter. So it definitely is the case that we are actually getting quite a good volume leverage as well at the moment.

and we should not forget we have still an order book you know of over 21 billion which we uh which we had you know it has not gone down actually during the last six six months so it's it's a very strong from that which will carry with us into 24. thank you very much thanks thank you and we'll have a follow-up question from gail deutsche bank

Thanks very much for the follow-up. Could you talk a bit about the impact coming from the mix? Because I suspect mix effects are now turning negative, right? Even the faster growth you're seeing in projects and systems and the ongoing destocking in the short-cycle businesses that have been historically more profitable. But we can't see the impact in your bridge, so I think that would be helpful if you could provide maybe any color on this phenomenon in Q3 and how to think about it going into next year.

Yeah. First of all, in Q3, mix continued to be a slight positive for us when we look at the margin bridge inside that bridge. But if you look at the mix overall, so the question is absolutely valid. We have more stuff on those, let's call it medium voltage type divisions. And earlier, the delta between margin of the short cycle type of divisions and these longer cycle divisions was bigger so these have really improved performance so it doesn't necessarily mean that even if we mix wise have more of this stuff and less of this stuff it will negatively impact margin because large motors and generators. I mean, Björn spoke about ELDS, system drives. All these divisions have significantly improved their margin performance, which is of course positive on this equation.

But I think we should not forget, especially in the service business, which is 50%, and we have a good double-digit growth in the service business, which shows that the underlying activity in the market is actually great.

Yeah, of course, as you say, PEA has also improved margin significantly, outside turbo being kind of like close to that 15% outside turbo.

And I think it would be good, of course, we measure our gross margin, of course, both in our revenues, in our order intake, but also in our order book. And we don't see any worrying sign there.

Thank you.

That's great. Thank you.

Thanks. And we'll take the final question from Will at Kepler-Chevreux.

Thank you again for the follow-up. I wanted to ask if you can just provide more insight into how the businesses that you've been working hard and successfully turning around are developing, namely the progress with large motors and generators in terms of its profitability against plan and the progress in installation products and lastly within the measurement and analytics segments.

Yeah, I'd be happy to talk about that. That's your question. I'd be really happy to talk about that because we see a significant improvement in all these three businesses. I mean, on the measurement and analytics, which was a crisis a couple of years ago, we have new management in place, they have a new operating model, and they have been delivering margins around 20% on that division. Maybe I'm not allowed to say it, but I do say it anyway. If you look at DS, which was a big challenge for us last year, I said it before, you know, they are up around 15% today, which is fantastic development so far. And we think there is more to come. If you look installation product, which was problem two, three years ago. Mattias and his team, they actually got this one about 20%. So it shows that with the right management, with the right operating model and the way they take it, it improves the businesses. On large motors, that was a crisis actually a year ago. where we had really low margin. But Heikki and the team have really made sure that we concentrate on the businesses where we make good money and make sure that we really get paid for the value that we are delivering. And, I mean, really good thing, they're over 10%. I probably shouldn't have said that, but still, I think it's so good that I'm really happy about those performance improvements. I mean, if you think about it, we delivered 17.4%. And I think last quarter, 17.5%. And I think this is a huge step changer for the group and absolutely the best performance way out that we have ever done before. And that's because of all the different divisions are now starting to deliver. So I'm quite proud of them. Yes.

Great. Thanks for the additional insight. Yeah.

Thank you. And I know I said it was the final question, but then we had one more coming in from James. And since we have a few minutes left, I think we'll only be fair to take it. So, James, your line should be open.

Oh, very kind of you. Thanks for squeezing me in. One clarification, two clarifications and a question. Did you say that on distributor inventory levels, you think that we're now at a normal place in low voltage, but we still have some destocking in motion HVAC and discrete automation still to go. I think you did. I just wanted to double check. And could you just... Yeah, maybe on that first.

Yeah, so that's what I said. But on top of that, I said that in electrification in parts which are related to residential construction, I mean, we can't, of course, see everything from here exactly. So there could still be something. But residential construction is only about 15% of the electrification overall business.

That's clear. And you called out Arctic. We're talking Azipod, which I think is quite profitable. Does that have any ramifications? And how long does that last for profitability?

Yeah, I can give you a little bit that, of course, they were pretty hurt of us moving out of Russia because there were some of those, let's say, ice-breaking LNG vessels, which was both a super profitable part of the business, but also quite a big business for us at the time. So the good thing is that we are seeing great orders from the cruising industry coming in, but it takes a little bit of time before the ships are being built and they are being delivered. We have had margin on the ACIPOD side because of underutilization of the factory this year. And we will also see some of that next year. But 2025, we should have the volumes now when we see what we have in the order book. But the production should be fully up and running with good capacity in 2025.

That's excellent clarity. Thank you. And just on acquisition and disposal, we talked about maybe doing whatever, 10, 15 small deals. We haven't done so many. How are you feeling about capital allocations at M&A with your current balance sheet?

Yeah, I think we said 5 to 10 first. I think that's where we are. And then we do a lot of small, let's say, minority stakes in startups. But that is driven solely by the divisions. Yeah, we've done two so far on the acquisition side. Maybe we'll get in a couple more, hopefully. I think we have a potential acquisition, which is quite long. We're working with a lot of projects, but you know how it is. both the seller and buyer who is agreeing on what the value of the business is and as you know in many of the new technologies where we are actually focusing on it's been some description from what the owners think a business is worth and maybe some of the markets and you guys how you look upon some of these business if you understand what I mean so You have to find the right dynamics there, but I can assure you that the divisions have a strong focus, especially the 70% of the divisions that have a strategic growth mandate.

That's very helpful. Thank you very much.

And now we will take the final question, and it comes from Max at Morgan Stanley.

Thank you. I was going to ask on M&A, but I guess given I was just asked about, could I ask about cancellations and I guess the backlog in RA? Given orders are coming down quite sharply now, are you seeing any kind of pickup in cancellations from that backlog? And maybe kind of an extension of that, are there any other areas where you see risk that we could have seen some of this kind of early ordering lead time sort of extension that we may subsequently see some normalization over the next couple of quarters? Are you able to get good visibility on that in some of the other divisions where it's kind of the smaller base orders that those won't also normalize? Thank you.

I think, you know, if you go back one year ago, I think the risk was much bigger. And at that time, we had a huge order book and a lot of distributors and companies building up because of our bad deliveries. Now it's gone one year and we have for quite some time, we have a pretty good supply chain of our products and things are moving out. So we don't see that as a risk. And on the robotics side, as I said, it's a very isolated problem on the robotics side to China. And that part. And there is a lot of distributors also handling out who has a lot of units in their inventory. So we're not afraid of cancellation, but they might hold back a little bit on the buying pattern.

We actually follow this stuff as well because we kind of believe in numbers.

many things and this has not grown it actually it's like super super low number so we have nothing major in cancellations and it has gone down from 22 to 23 yeah and of course we have now for a number of quarters had a lot of large orders coming in so of course in our order book there is a lot of large project that is actually running and many of these are transformational and they will take place

Yeah, but the answer is no, nothing there.

Yeah. Okay.

Okay. Thank you. Thanks, Max. And thanks, everyone else, for hooking up with us today. And we'll see you in about a quarter's time.

No. No, no, no.

No, no. We'll see you in November, end of November.

Yes.

At the CMD.

So I hope we'll see many of you down in... In Italy. Yeah, Italy.

Yes.

Looking forward to some exciting days there.

Indeed. Yeah. Take care until then. Bye-bye. Bye.