ABB Ltd

Greetings to you all and welcome to this presentation where we will talk through ABB's results for the second quarter. I'm Ann-Sofie Nord, Head of Investor Relations, and next to me here today is our CFO, Timo Jamotila, and for the last time, also our CEO, Björn Rosengren. They will take you through the presentation after which we, as usual, open up for the Q&A session. Before we begin, though, I should mention the information regarding safe harbour notices and our use of non-gap measures on slide 2. And this call includes forward-looking statements which are subject to risks and uncertainties. And with that said, we kick off and I hand over to you, Björn.

Thank you, Ansi, and a warm welcome from me as well. Let's start on slide three with a summary. The quarter developed pretty much as planned, except for a couple of areas. First, the record high operational EBITDA margin of 19% is better than we originally expected. This was driven by strong performance in three out of four business areas, while robotics and discrete automation came in on the low side. We also had some margin support from one-offs and a slightly lower corporate line. Secondly, the market for machine automation is now weaker than anticipated. And lastly, performance in the mobility business is weak. But for the most of our businesses, the market activity was solid. And I was very good to see growth in the short cycle orders. This compensated for the lower bookings in large orders compared with last year. Our sustainability is core to ABB and part of the purpose. Our Scope 1, 2 and 3 targets have now been approved by the Science-Based Target Initiative. We are committed to reduce our own emissions and support our customers in their journey to transform towards low carbon and energy efficiency. A good example of this is the launch of the robotics new Omnicore controller. Compared with the previous version, this controller can make the robot operate 25% faster and consume 20% less energy. It's really great to see our R&D efforts turn to customer value. As an extension to our R&D, we continue to invest in technology startups. This quarter, we took minority position in two AI-based cleantech companies. But we also announced an acquisition in the smart building division. We complement our offering in wiring accessories and broaden our market reach in China by taking over Siemens wiring and accessories. When the deal closes, it will add revenues of more than $150 million. As both Morten and Tarak will leave their positions, we are happy to announce their replacements. Jean-Pierre and Brandon are new presidents for the business areas Electrification and Motion. Some of you have already met them at our earlier CMDs. They both have a long history with ABB and they have proven themselves as great business leaders in the ABB way operating model. Now let's talk about the market development on page 4. In the second quarter, comparable orders remained stable year-over-year. Book-to-bill was positive at 1.02. And orders backlog remained high and above $22 billion. I earlier mentioned the short cycle orders. After several quarters of weakness, we now have a positive growth, driven by electrification and motion. In the long cycle business, the underlying customer activity remains solid and project pipeline intact. But the comparable was high for large orders bookings. For example, last year, the big Rio Grande order. Let's take a look at the different segments. Demand continues to be very strong in data centers, and we had a very high growth. There are also good development in areas of infrastructure, marine, but also ports and electrical traction solutions for rail. The building segments improved, driven by the commercial area, and general industry was stable to slightly improved. It was good to see all the growth in the robotic business. I already mentioned the weakness in machine automation and the mobility business. Orders were slow in immobility, where customers hold off on investment, particularly in Europe. In this business, we just launched a new DC charger, which upgrades technology. It has been well received by the customers, and it should support orders intake toward the end of the year. Timo will talk about the machine building segment later. Now let's turn to slide five and look at the development by region. Overall, the U.S. remains the most robust market with good demand in the short cycle business. While the total of the American region declined, impacted by the timing of large orders. AMEA increased comparable orders by 9%, with a particularly strong quarter in Australia and in part of the Middle East. China declined year over year, with weak activity particularly in the process automation, and continued weakness in residential buildings. Sequentially, China remained pretty stable, and our view of the China market has not changed during the quarter. Europe dropped by 4%, mainly due to weakness in the machine automation, which has the most of its business in Europe. Now let's turn to slide 6 and our earnings outcome. In the charge, you see the strong improvement in both earnings and margins. Operational EBITDA was up 10% and margin increased by 150 basic points to 19%. A new all-time high. And it was good to see the gross margin improvement. We had good performance in three out of four business areas. Robotic and discrete automation was impacted, mainly due to decline in the machine automation division. Here the market is challenging, but remember that this business represents only 3-4% of total ABV. The strong performance for the group was supported by leverage on higher volumes and positive pricing. This more than offset slightly higher spend in, for example, R&D and SG&A. Corporate and others netted out at minus 67 million. And Timo will now talk through the details as there are some puts and takes. Timo.

Thanks, Björn. Yep, let's look at the different components. But first, of course, welcome to you all from my side as well. So, in the details of the corporate and other line, we had some positives and negatives, which may not repeat. On the positive, we had a total of about $75 million related to a reduction of a self-insurance provision and a provision reversal linked to the non-core business. These positives were partially offset by impairments of $48 million in immobility, which elevated the total quarterly loss in this business to $87 million. The net effect of the two positive non-repeating items and the immobility impairments supported the 19% margin by about 30 basis points. In addition, the underlying corporate operational costs were slightly lower than anticipated. While there is volatility between quarters, I expect the annual run rate for corporate costs in the coming years to be at the 300 million level, as we have mentioned before. To round off the crew performance, it was good to see the 22% increase in EPS to 59 cents. And I just want to add to Björn's earlier comments on e-mobility. Clearly, this is a transformation year for this business. This means technology investments to a new, best-in-class-focused product portfolio for DC chargers. These investments and a weak market impacting sales of the old portfolio have burdened results so far this year more than expected, and unfortunately will continue to do so also during the second half of the year. Next year's performance should be significantly helped by both better operations as well as by orders of the new upgraded products driving better cross-margin. Now let's flip to slide 7 and electrification. Here, the market environment remains very strong, and it was good to see that orders again hit the 4 billion mark, growing 7% on a comparable basis. It is encouraging that the pattern of short cycle order growth continued from the previous quarter, this time at a double-digit pace. Customer activity remains persistently high in the project and systems-related businesses, although orders declined from last year when we had a very high share of large orders. The data center segment continues to stand out as clearly the highest growth segment for EL in orders, but also the infrastructure segment improved strongly from last year. Encouragingly, we had a positive development in the important building segment. Commercial building was up in all regions, and the strongest momentum was noted in the US. On the flip side, residential buildings were still muted, with a broadly stable development in both US and Europe, and continued declines in China. Looking at the chart in the middle, you see that we had record high revenues in electrification, even without the power conversion division, which was divested in July last year. Revenues reached $3.8 billion and grew 7% on a comparable basis. Virtually all divisions contributed to the strong revenue growth, which was primarily driven by higher volumes, but also by positive pricing. Impressively, electrification delivered another record quarter for both earnings and margin. Operational EBITDA was up by 13% from last year with a margin of 23.2%. Really well done by the team. Looking ahead into the third quarter, we currently expect double digit growth rate in comparable revenues and the operational EBITDA margin to be similar to the second quarter. Let's then move to slide 8 and the motion business area, which delivered yet another quarter with orders of more than $2 billion. Even so, the orders declined by 4% year-on-year from the fairly high comparable. Just like in electrification, the short cycle orders improved, but this was more than offset by declines in the project and system-related divisions, where orders can be lumpy. Book-to-bill was 1.03, adding further to the already considerable backlog. We continue to see strength in the areas of rail and power generation. HVAC was positive, driven by commercial buildings, mainly in the US. Oil and gas declined from last year's high level, and slump slowness was noted in metals and chemicals. Shifting now to revenues, which was supported by backlog execution and a positive price impact. This was, however, more than offset by lower volumes in the short cycle areas, as the order improvement did not yet convert to revenues. This summed up to a year-on-year decline of 1% in comparable revenues to $2 billion. While earnings decreased slightly by 3%, the margin reached a healthy 19.9%. This despite the adverse mix from lower volumes in the higher margin short cycle divisions. This is a good indication of the impressive profitability improvements in the projects and system businesses. Looking ahead into the third quarter, we anticipate a single digit comparable revenue growth year on year and operational EBITDA margin to be similar to the second quarter. Turning on to slide nine and process automation, which delivered another strong quarter. Orders reached $1.8 billion and grew strongly by a comparable 10% from last year, albeit on a relatively easy base. From a customer segment perspective, there was a strong trend in marine, boats and chemicals, whereas oil and gas remained broadly stable at the high level. A more muted environment was noted in the areas of pulp and paper, as well as metals and mining. However, the overall market is healthy and the project pipeline remains robust and intact. Now turning to revenues. Process automation surpassed our original expectations as they executed well on their strong order backlog. They delivered a 12% increase in comparable revenues, reaching $1.7 billion. The growth was supported by three out of four divisions and was driven by both volume and slight positive price impact. Strong development in the service business was also helpful. It was nice to see process automation deliver yet another quarter with a margin above 15%, more precisely 15.5, with operational EBITDA improving 10% year-on-year. This good outcome was triggered by execution of the order backlog with a higher gross margin, offsetting somewhat higher SG&A and R&D expenses. Looking at our expectations for the third quarter, we foresee at least mid-single-digit growth rate for comparable revenues and the operational EBITDA margin to be sequentially similar or slightly down. On slide 10, we turn to robotics and discrete automation, as in previous quarters, we need to look at the divisional levels to understand the diverging market environments. Starting with robotics, it was encouraging to see a slight growth in orders both year on year and sequentially. This was mainly driven by the segments of general industry and warehouse automation for consumer industries, as well as service. This growth was, however, partially offset by the negative developments in automotive and electronics. Importantly, the impression from the local teams is that inventory levels in the channels are aligned with the current market situation. This adds comfort, and we expect orders to increase sequentially. Now turning to machine automation. As Björn already mentioned, this division is facing a challenging market environment. Customers continue to hold back on new orders following a period of pre-buys. As our backlog is now normalizing and we are getting a feel for where the real market is, we clearly sense a lower level than foreseen. Our customers have high stock levels and we expect a continued challenging order situation for the remainder of the year. Both divisions reported a decline in revenues. The positive order development in robotics did not yet convert. And the market slowed down in machine automation weight on revenues as the backlog is normalized. For the business area as a whole, this resulted in quarterly revenues of $833 million, down 8% on a comparable basis. The lower production volumes in both divisions resulted in underabsorption, which weighed on earnings and margins, particularly in machine automation. Operational EBITDA margin dropped by 420 basis points from last year to 11.1%. On the back of the weaker market, machine automation has initiated further cost measures to defend future profitability. However, benefits from these actions will not start coming through until towards the end of this year, meaning we expect the margin to be under pressure in the third quarter, which however should be the trough period for both revenues and margin in machine automation. In total, for the quarter, we expect negative growth in the mid-teens range in comparable revenues and sequential pressure on the operational EBITDA margin. Moving on to slide 11, showing the group operational EBITDA bridge. The impacts from our positive price execution at about 1% and leverage on higher volumes more than offset the adverse effects from an increased spend in R&D and SG&A. The provision reversals booked in corporate this quarter helped to offset the higher than anticipated loss in the e-mobility business, as we mentioned earlier. All in all, a 10% improvement in operational EBITDA with a 150 basis points margin increase. Finally, from me, let's move on to cash flow on slide 12. The 918 million of free cash flow is in my view, another solid cash delivery. Our free cash flow of almost 1.5 billion for first half 24 adds to our confidence of at least reaching last year's good level. All business areas improved cash generation from last year. The increase was mainly driven by a lower buildup of networking capital with improvements in all key components, but also a slight increase in operational performance. Networking capital in relation to revenues remained sequentially stable at just above 11%. Now, at this point, I would normally just hand over to Björn to finalize, but as this is our last quarterly call together, I would like to thank you, Björn, for great cooperation during the years we have worked together and wish you all the best in your future endeavors. It's been also fun. So, and with that, I would hand over to you to finalize this presentation.

Thank you, Timo. And likewise, it has been a pleasure working with you too. So let's finish off with outlook comments on slide 13. For the third quarter, we anticipate a sequentially higher growth rate in comparable revenues and operating EBITDA margin to be around 18.5% or slightly below. Now, Ansi, let's open up for questions.

Yes, let's do so. And just as a quick reminder for those of you who have dialed in on the phone, please press star 14 to register to ask a question. And also just remember to mute the webcast as your line is open and limit it to one question. That way we allow for as many as possible of you to get through. But you can also put questions through the online tool in the webcast and then I will voice them over from here. And just before I let the questions flow, I just want to say that if all goes to plan, we will have our incoming CEO, Morten, popping in right at the end. So stay tuned. And with that said, we'll open up for the first question. And the line should be open for you, Daniela Goldman Sachs.

Hi, good morning. Am I on now? You are. Perfect. Thank you very much. So I have two questions. One more on the shorter term and then one for Bjorn has his last call. But on the shorter term, I see quite strong commentary regarding construction, especially on the non-resi side, but in contrast with the high rates and a lot of data like the Architectural Billings Index and the Dodge Momentum and other metrics that have been a bit more on the weaker side lately. Can you comment on exactly is it sort of market share gains that you think you have had on this segment? Is it specific to electrification? How do we see the sustainability of this going forward given some of the leading indicators?

Want to take it?

Yeah, sure. Thanks, Daniela, for the question. I mean, as we said, the commercial construction showed strong performance for us. And I would say that some of our divisions have also diverted their activity to this area. given that it's been a little bit weaker in the resi. So if I just give one example in our electrification smart buildings, we actually had almost 10% growth in orders this quarter. And that's really, you know, testament to these guys also going after new markets. So I can't give sort of any market share gain statistics, but commercial construction was strong for us, particularly US driven by electrification, but also some other markets like, for example, Middle East. So that's what's driving it.

Mm-hmm. Thank you. And then I guess sort of for Bjorn, given it's sort of the soon departing, when you look at the structure of the portfolio today, what are the areas that you would say sort of you wish you had seen further progress? Are there still any areas of particular self-help that you think either organic or inorganic provide an opportunity going forward or pretty much is more about growth going forward?

Yeah, first, I think one of the important journeys that we did was moving the company from some perceived as a conglomerate to a more purpose-driven structure. And, of course, that's driven by electrification and in automation. I think if we look at our... Divisions today, they are very much aligned with the purpose. And I think also most of our businesses are number one or number two in the areas where they operate. So I think we see a good structure today and good product lines operating.