ABB Ltd

Greetings and welcome to this presentation of ABB's third quarter results. You will hear from our CEO, Morten Vidröd, and also from our CFO, Kristian Nilsson. And they will talk through the results as per usual. And after this, we will open up for a Q&A. I'm Ansa Fenod, Head of Investor Relations. And with that, let me hand over to you, Morten, to kick off the presentation.

Thank you, Ansi. In the third quarter, we continue to see a strong market, with orders once again reaching just above 12 billion. I would say that we perform well in a vibrant market. When it comes to our operational performance, we progress more or less as planned and guided for, a good mid-teens revenue growth. And the 20.8% operational EBITDA margin is the strongest Q3 margin ever for ABB. And the same is actually valid also for the EBIT margin of 19%. We continue to generate a standout return of capital employed, which was at 29.9%. And I expect our business to continue to improve and support ROSI. We have said that we will deliver more than 20% return on capital employed also when we start making more sizeable acquisitions. And speaking of acquisitions, following the road torque announcement in July, we today announced further capital allocation toward M&A. We will take a 51% ownership in a joint venture formed with Mitsubishi Electric's low-voltage power distribution business. and we also have a clear mid-term path to full ownership. This deal makes us the low-voltage market leader in Japan and one of the world's largest electrification markets where we have had limited reach until now. We also view this as a door opener for growth across Southeast Asia to markets like Malaysia, Thailand, Vietnam and Indonesia. On the product side, they bring circuit breakers, motor starters, contactors and control devices, and beyond that, energy measurement and monitoring equipment. The product portfolios are similar and we can apply a best of both worlds integration principle for platforms and technology. The Mitsubishi business coming into the JV has around 2,800 employees and in fiscal year 2025 it generated around $640 million of revenues with a low double-digit EBITDA margin. In terms of performance improvement, it will be similar to what we successfully did with the GE industrial solution acquisition. We will drive profitability by expanding sales through combined channels and we will introduce ABV products and technology to Mitsubishi Electric's customer base. We aim for the JV to be running at an operational EBITDA margin of at least 20% five years after deal completion. The transaction values the new company at an EV of around $890 million. This translates to EV over sales of 1.4 and EV over EBITDA of 11.1 based on 2025 actuals. Performance is initially low in the JV, hence multiples paid are at a meaningful discount to ABB, even before we are counting for synergies. When we include the expected synergies, the EV over EBITDA multiple reduces into the mid to high single-digit range. We see strong returns on this deal, with internal rate of return well above our cost of capital, and we expect the deal to close during the second half of 2027. Another significant milestone this quarter was the launch of the Infinitus Direct Current Portfolio. This new portfolio enabled us to support AI data center customers across the full spectrum of DC architectures, from source to rack. It spans across the wide space localized DC designs to native centralized high density architectures. But DC is not new to us. We started our R&D investments into solid state technology already 15 years ago. but at that time it was aimed at marine applications. Now, there are multiple examples where direct current solutions drive the industry forward, like in rail, renewable energy, microgrids, and now also in future AI data centers. We decided to invest early in DC, because the technology solves real customer needs. First, it enables higher power levels, it facilitates data center rack densities to shift up to 1 MW, and facilities can scale from 200 MW to 1.5 GW. Second, DC is more energy efficient. Fewer AC-DC conversion stages mean lower energy losses. A 500 MW data center shifting to DC architecture can reduce conversion losses by more than 5%. This would save almost 200 GWh annually. That's the electricity consumption of 60,000 European households, or some tens of millions of dollars in cost savings. For a 100 MW facility, a 5% improvement in energy efficiency can free up additional 5-6 MW for token generation. This is worth close to $100 million in potential annual revenue for the operator. Our portfolio is built on the concept of five modular building blocks. This allows our customers to select and combine what they need to construct a complete system. This means we can support diverse data center topologies from hybrid transitional architectures to optimized target design. The building blocks span the entire power path from medium voltage grid connectivity or behind the meter generation to DC conversion and distribution to power protection systems and cooling optimization. The modularity is critical because the transition to native DC architecture will be staged rather than immediate. And we talk about four distinct design phases. I've said earlier that we view the sidecar as an interim solution. And we rather expect the economics of centralized DC architectures to ultimately drive customer decisions. And with the Infinitus portfolio, we are ready, including our solid-state transformers available to order in the second half of 2027. That said, there will be no universal architecture. The market will evolve across a spectrum, and with the Infinitus portfolio, we can serve every segment. When you compare the localized DC with the centralized design, labeled 2 to 4 on this slide, it is visible how the weight of the electrical power infrastructure shifts from the white space to the gray space. We believe that in the target DC architecture, as much as 75% of the spend on electrical power infrastructure can be linked to the gray space. This compared to about 55% in a legacy AC architecture. The gray space already represent the majority of our data center exposure today. And the shift towards centralized high density DC meaningfully expands our addressable scope. And another proof point of our DC capabilities is our partnership with Ferrari Hypersail. We will support Ferrari Hypersail with expertise across marine power, DC technology and advanced electrical systems. Our solutions will be installed on their 100-foot oceanic full-foil monohull yacht, powered by renewable energy. The DC architecture will function as a high-performance, self-sufficient microgrid with systems operating at 48V and 800V DC. The vessel is designed to bring together speed, resilience and safety with onboard energy generation and management in one of the most technically demanding environments. Yet another DC happening in September was the report we published in collaboration with BCG. The report makes the case that direct current technology is moving from the periphery to the centre of industrial, commercial and digital infrastructure. The future of power distribution is not an either-or choice between AC and DC, but a hybrid system that combines the strengths of both technologies. AC and DC each have important roles to play and together they can help build a more efficient, resilient and future ready electrical system. Now let's turn back to the third quarter results. I already mentioned the order intake of 12 billion. This reflects a comparable increase of 40% from last year. and we're in a good market situation for all three of our business areas. Orders were supported by strengths across our entire portfolio, meaning short cycle products, service as well as the project and system businesses. And we saw orders increasing in the majority of our customer segments. Data Center was the standout, delivering triple digit growth with no signs of demand softening or capex hesitation from our customers. But there are some softer areas, and similar to previous quarters, we see low customer activity linked to process industries and residential buildings. But I let Christian go into segment details when he talks through each business area. In total, book-to-bill reached 1.24, and the order backlog expanded to just about $32 billion, almost equivalent to 2025 full-year revenues. There is always a mix of short and long cycle, but naturally it is the project and system business that predominates in the backlog. As you know, we have had very good order intake from segments like data centers, marine and rail. These are businesses with long lead times, skewing mix in our backlog further toward longer delivery times. So mix in the backlog is one thing to keep in mind. The other is production capacity. We have an overall good position and you often hear me talk about our strong delivery track record. This is important to us and we are investing incrementally as you have seen in our announcement. CapEx is tracking at a higher level of around 1 billion. With demand having been so strong in the last 12 to 18 months, some product lines are now approaching high utilization, mostly so in electrification, until ongoing investments gradually become fully operational during 2027. All three business areas contributed to comparable revenue growth of 14%. Volume expansion was the primary driver, complemented by net pricing realization of just about 2%, a stronger contribution than in Q2. And we saw double digit improvements for both the short and long cycle businesses. Looking at the different geographies, comparable orders were up by double digits in all three regions. The Americas continues to be the strongest growth driver and increased by 70%. This was driven by the US, where orders were up by as much as 82%. This high number includes large bookings, but base orders were very strong and improved by about 50%. Europe was up by 10%, supported by increases in most of the top 10 markets. Asia-Middle East Africa improved by 29%, with China up 25%. China orders increased in all three business areas, with strong double-digit growth in both electrification and motion. Now we turn to earnings, which reflect both favorable market conditions and a strong operational execution. We improved operational EBITDA by 24% to $2 billion, up in all three business areas. And as I mentioned in the beginning, a group margin of 20.8%. Operational leverage on higher volumes was the main contributor to our improved result. The solid price execution and the forever ongoing efforts on continuous improvements compensated for inflationary cost impacts and higher spend on R&D and SG&A. We reduced expenses in corporate and other and losses were lower in the e-mobility business. All included a job well done by the team and we keep moving in the right direction. That said, while we improved business performance, the earnings per share of 65 cents actually reduced by 2% from last year. There are two main drivers to this. The first being a non-cash unrealized FX hedged linked to the ongoing Rotorq acquisition, which weighed on earnings by about 115 million. And depending on FX movements, we may have some additional volatility in finance net until we close the deal in the first half of 2027. Secondly, we had a lower result in discontinued operations. This is, of course, linked to the ongoing separation process in the robotics business. We are working towards our ambition to complete this divestment by the end of the year. And with that, I hand it over to you, Christian.

Thanks, Morten. So let's take a look at what happened in the different business areas, starting with electrification. Demand remained persistently strong and drove order intake to a new record of close to $7.7 billion. This represents a standout increase of 70% from last year. But it was also up from the already high level of second quarter. So what drives this exceptional demand? The segment trends have not really changed from what we've seen earlier in the year. The data center segment stood out again with a triple digit order growth with no signs of slowing customer activity. That said, it is a tall order to expect triple digit growth in each quarter going forward. It may be as simple as impact of timing of order bookings and also the base is getting rather sizable. But electrification is not all about data centers. It was very encouraging to see order growth excluding data center reaching the high teens level. And all our large customer segments in electrification grew at a double digit pace. To mention a few, we saw a strong increase in the utility business with investments going into the grid refurbishment and expansion. orders in the building segments was up due to strong commercial demand. It improved also in China, where we performed well in an otherwise bleak commercial building market. We have executed well in areas like high-end hospitality, as well as niche-backed public funding like healthcare and education. Turning now to revenues, which amounted to $5.4 billion. the very strong comparable growth of 21% was above all supported by higher volumes. But the team did a good job on pricing, which contributed with around 3%. This is a stronger contribution compared to Q2, so a good realization trend. And it was encouraging to see that pricing now broadly offset commodity inflation. The strong revenue growth with added contribution from continuous improvement efforts converted to 27% improvements in operational EBITDA to $1.4 billion. And the margins was up by 110 basis points to 25.6%. Again, new records for electrification. All included a great performance by the team. Now, looking at the fourth quarter, we expect comparable revenue growth to be in the high teens to low 20% range. And while we expect a repeat of the usual seasonal pattern of sequentially softer margins in Q4, we anticipate a slightly softer drop compared to the historical average of around 150 basis points. Now we turn to motion where order intake of $2.5 billion corresponded to a strong comparable growth of 12%. This improvement was driven by the short cycle business with large order declined from last year's high comparable. Similar to previous quarter, we saw strength in the grid related investments. HVAC for commercial buildings and data center cooling, as well as food and beverage also contributed to the growth. A more stable trend was noted in oil and gas, and while there may be quarterly differences, I would say that process industry related demand in pulp and paper and chemicals continues to be overall muted. Turning now to the revenue at 2.3 billion, which grew by 9%. The increase was mainly driven by strong demand in the short cycle business, while we also executed on the order backlog. Main driver for revenue growth was higher volumes with added contribution from a solid price development. In Motion, we also had about 2% revenue contribution from M&A. As in recent quarters, profitability in Motion was under pressure despite the positive impact from higher volumes. Year on year, the operational EBITDA margin declined by 100 basis points to 19.1%. Our Gamesa Electric acquisition hampered margins by about 40 basis points, still operating at a small loss. Pricing was robust, also in motion, and we were able to offset commodity inflation in absolute terms, although still with some margin dilution. For the fourth quarter, we expect motion to achieve comparable revenue growth similar to the Q3 level. And in contrast to the usual pattern, we expect operational EBITDA margin to slightly improve sequentially. The stronger-than-usual quarter-on-quarter development is supported by improved operational performance in the project and system business, where we've had some inefficiencies earlier in the year. Next, we turn to automation, where orders remained stable versus prior year, at $2.1 billion. The order number is sequentially lower, but this is more due to timing of order placement rather than a real change in underlying customer activity. We still see good demand linked to our offering for higher energy efficiency and energy resilience. Demand for marine and ports electrification and automation remains high. And we see improving market sentiments linked to discrete automation in the machine building segment. Order growth rates were strong, although still on a fairly low comparable. Demand in the oil and gas segment is generally robust, bearing weakness in the Middle East. Similar to what I mentioned for Motion, we continue to see bleak process industry markets for chemicals and pulp and paper. Orders in mining remain muted in the quarter. But our colleagues are mentioning that they sense some initial improving sentiments in the customer interactions about future mining projects. Early days, so let's see and follow up on this one. Nuclear is a small segment for us, but an area where we see high customer activity. Revenues reached 2.1 billion, up 5% on a comparable basis. The improvement was driven across the spectra of backlog execution, product business and service. Despite gross margin pressure from items like unrealized FX and commodity derivatives and some cost inflations, the operational EBITDA margin improved to 14.8%, up 90 basis points from last year. The margin improvement was driven by solid execution of the order backlog with an increased profitability. and also a stringent cost control in SG&A and R&D, which reduced in relation to revenues. For automation's fourth quarter, we expect a low to mid single digit comparable revenue growth. And we have the ambition to keep the operational EBITDA margin broadly stable from Q3. This will be a stronger outcome than the usual pattern of a sequential drop in Q4. Looking at cash flow, it was another solid quarter with free cash flows of $1.6 billion, supportive to our strong free cash flow margin trend. The slight year-on-year increase of 2% was driven by higher operational earnings in continuing operations. We also kept disciplined in our trade networking capital management with no material cash impact. This was partially offset by somewhat higher capex spend and the lower cash flows in discontinued operations. But all in all, it was a good cash quarter. So far this year, we have generated $3.7 billion in free cash flow. We expect good business driven performance also in our fourth quarter, and we received the cash contribution of around $300 million linked to the real estate sale we just announced. we are well on track towards improving free cash flows from last year's 4.6 billion. And with that, I hand it back to you, Morten.