ABB Ltd

Greetings to you all and nice to connect again as I welcome you to this presentation where we will talk through the results for ABB's fourth quarter. 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 questions. But before we begin, I should mention the information regarding safe harbour notices and our use of non-gap measures on slide two of the presentation. This call includes forward-looking statements based on the company's current expectations and assumptions, which are subject to risks and uncertainties. And with that said, we kick off the presentation and I hand over to you, Björn.

Thank you, Anssi, and a warm welcome from me as well. I want to start with some quick reflections on 2023. And I'm proud to say that it was a record year for ABB. Some proof points of our success includes that we improved on all lines in the P&L and in many cases to new all-time high levels. We delivered record high cash flow and return on capital employed. A great team effort. So how did we do this? First, it was a solid overall market environment. We have a good business mix and this year we saw a strong momentum in the long cycle business, which more than offset the weakness in part of the short cycle offerings. In total, our comparable orders improved by 3% and our book to build ratio was 1.05. Secondly, We are more efficient and agile company. We took actions to further push the ABB way operating model within some divisions. And one success story is that the turnaround in the large motor business. They have done a great job and improved in many ways, including how they work with value based pricing. It was really good to see that they took the margin to a double digit territory. But I do not look at 2023 as something extraordinary. What do I mean with that? You know our business is to help the world accelerate the energy transition towards electrification. We also help customers to become more efficient and safe through our automated and digital manufacturing. ABB has a leading position in markets driven by strong secular trends. And we are confident about the future, which is why we raised our long-term financial and sustainability targets at the CMD in November. In short, we target higher growth and higher returns while enabling a world with net zero emissions. Finally, on 2023, the board proposes a dividend of 0.87 Swiss franc. The increase of three rappen from last year is more than the usual annual increase of two. This is based on the strength of the ABB way operating model and the future proof market position. We also expect to continue to utilize share buybacks as a way to return excess cash to shareholders. Now let's turn to page four for some more detailed comments on the fourth quarter. My key takeaway from Q4 are that comparable orders remained stable from last year. meaning total demand is holding up despite weakness in the short cycle business. Book-to-bill was below one, but I'm not so worried about that. It is a normal pattern in the fourth quarter. I expect stronger outcome already in Q1. Secondly, we improved operational performance and delivered record cash of 1.9 billion. up by 1.2 billion from last year and even stronger than expected. And we improved return on capital employed by 460 basic points to 21.1%. A strong outcome in my view. Lastly I'm pleased to see the division utilizing our strong balance sheet. We have recently signed seven small bolt on acquisition. Most of these deals add more embedded software and AI capabilities to our offerings. This will support our market position long term. In summary, we delivered in line with our guidance and I'm pleased with the solid finish of the year. Now let's turn to page five for some more detailed comments on the market development. As I mentioned earlier, demand was resilient and comparable orders increased in three out of four business areas. We saw a stable to positive development in most customer segments. with the softer areas to mention being residential constructions, where we see weakness in both China and US, while Europe seems to be stabilizing at the low level. The other areas was discrete automation, where we saw similar pattern as in recent quarters. Timo will talk more about the details on the slides on the robotics and discrete automation. We expect the challenge in RA to persist also in Q1. However, we believe the fourth quarter was a low point for absolute orders. In total, for ABB, orders remained stable year over year, and the order backlog remained strong at $21.6 billion. Now let's turn to slide six and look at the market pattern from a geographical perspective. Comparable orders increased in two out of three regions. The Americas is still where the underlying market is most robust, with a continued solid customer activity in the US. EMEA grew by 2%, and we see a strong development in, for example, India. But China is a challenge. With the software activity in several segments, Europe declined by 5%, mainly impacted by the weakness in discrete automation. Now let's turn to slide seven, our earnings outcome. In the chart you see the strong improvement in both earnings and margin. Operation EBITDA was up by 16 percent and margin increased by 150 basic points to 16.3 percent. This was supported by good price development and higher volumes which clearly offset the labor cost inflation. I am pleased about the outcome. This was the fourth consecutive quarter where gross margin was about 35 percent, a strong improvement compared to historic levels. In total, the fourth quarter was a solid end of the year. With that, I will hand over to Timo.

Thank you, Björn, and greetings to everyone from my side as well. As usual, let's start with electrification on slide eight. The market pattern remained very similar to the previous quarter. Comparable orders improved by two percent from last year. So a continued resilient demand where the project and systems relating offerings was robust. and the short cycle business actually stabilized after some weak quarters. In terms of market segments as a total, it was only residential construction which declined overall, weighted down by weakness in both the US and China. However, on a positive note, we saw some signs of stabilization for residential demand in Europe, including Germany. The other area to mention is China. Not all is bad, like continuing strong demand for data centers, but several other large segments declined, including both construction and utilities. Turning now to revenues, the electrification team again did a great job executing during the quarter, resulting in 8% comparable growth. Higher volumes was the main driver, with good additional support from price execution. it's really nice to see electrification holding on to their established higher margin level. At 19.7%, the operational EBIT-A margin improved by 310 basis points from last year, with a fairly even support from volume and price. This more than offset the higher labor costs, as well as higher investments in R&D and SG&A expenses. All in all, another strong quarter for electrification. Looking ahead into the first quarter, we currently expect the growth rate in comparable revenues to be similar to what we saw in Q4 and the operational EBITDA margin to be slightly up sequentially. Let's then move to slide nine and the motion business area. Thanks to the continued good momentum in the long cycle businesses, with some large orders booked mainly in the traction division, comparable orders increased by as much as 13%, admittedly from a relatively low level last year. From a segment view, this meant that customer activity was high in the process-related areas of oil and gas, chemicals and mining, as well as for food and beverage and rail. A weak construction market waited on demand for the HVAC side. Revenues were up by 2%, again surpassing the $1.9 billion level. The impact from higher pricing and volumes in the drives divisions more than offset the slightly softer volumes in the motor divisions. While the gross margin was slightly up from last year, Motion's operational EBITDA margin came in at 16.6%, decreasing by 80 basis points. The main reason to the drop was some product quality costs with a negative impact of about 60 basis points year on year. This was limited to this period and should not be a topic in the coming quarters. Looking ahead into the first quarter, we anticipate a low single digit growth year on year in comparable revenues and operational EBITDA margin to decline somewhat from last year due to a changing mix with a higher share of long cycle deliveries. Turning to slide 10 and process automation, where comparable orders increased by 5% year on year. This includes a large order booking of about 150 million, which will be delivered over a number of years. From a segment view, the marine and ports demand was strong, but we also saw good momentum in low carbon related areas such as LNG, hydrogen and carbon capture. The product business noted some slowing momentum after a period of really strong growth. Comparable revenues were up by 10% with strong growth in all divisions. This was driven mainly by volumes, but also some positive pricing coming through. It was another good margin quarter for process automation. They delivered an operational EBIT-A margin of 14%, improving 80 basis points year on year, and with all divisions at double digit margin levels. Most divisions contributed to the underlying improvement on the back of better project execution and delivering higher volumes from the backlog with improved gross margin. Looking at our expectations for the first quarter, we foresee a mid single digit growth rate for comparable revenues and the operational EBIT R margin to be slightly up from the Q4 level. On slide 11, we turn to robotics and discrete automation, where comparable orders declined sharply by 33% from last year. The market pattern is similar to the previous quarters, meaning in machine automation, customers are holding back on placing new orders as our delivery lead times are reducing back to the shorter normal time span. In robotics, demand declined across the board. 3C electronics was the key weak segment, and although automotive orders softened somewhat year on year, this is more linked to timing of some large orders rather than a real change in the market. RA orders are challenged right now, but we expect, as Björn said, the fourth quarter to have been the trough quarter for absolute order intake. We anticipate order normalization to level off during the first half of the year. Moving to revenues, which decreased by 7% on comparable basis, the machine automation division had strong revenue growth as they execute on the order backlog. However, this was more than offset by the missing book and bill volume in the robotics division. It was good to see that RA margin held up well at 13.8% and keeping largely stable despite the drop in revenues and added pressure from labor inflation. This was achieved through improved mix with higher volumes in machine automation, as well as by stringent cost control. For the first quarter, we expect a mid single digit negative growth in comparable revenues and some sequential pressure on the operational EBITDA margin due to mix impacts. Then moving on to slide 12, 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 positive price execution at about 2% and leverage on higher volumes more than offset the adverse effects from cost inflation related mainly to labor. All in all, a 16% improvement in operational EBITR with 150 basis points margin increase. Let's now move on to cash flow on side 13. Now, this is a really nice picture. You may remember we set a target for ourselves to deliver a free cash flow of $3 billion this year. We did even better with total free cash flow of $3.7 billion. All business areas contributed with improved operational cash flow, and the fourth quarter was a really strong finish to the year. It was good to see that our focused efforts paid off as networking capital was reduced sequentially and the ratio to revenues was at 10.2% down from 12.8 at the end of Q3. We lowered inventory levels and reduced receivables despite the strong revenue growth. We also had some additional support from customer advances, a great job done by the ABB team. and we expect a good cash delivery also in 2024, supported by operational earnings and continued focus on networking capital. Then taking a look at our return on capital employed development, you see in the chart that we clearly beat our target of about 18%, as we reached an all-time high level of 21.1%. A strong return on capital improvement of 460 basis points was driven mainly by better operational performance. As you can see, last year's capital employed calculation included the negative impact from the 19.9% ownership in Hitachi Energy. However, even excluding this, the improvement was still an impressive 330 basis points. Overall, the improved return on capital employed is a good indicator that we are really improving ABV's long-term performance and operating at a best-in-class level. And with that, I will hand off to Björn to round off this presentation.