ABB LTD Q3 2024 earnings call

Greetings to you all, and welcome to this presentation of ABB's third quarter results. Next to me here is, for the first time, our new CEO, Morten Wierod, and our CFO, Timo Ihamuotila. I'm Ann-Sofie Nordh, Head of Investor Relations. This time, we're gonna do things somewhat differently. We'll first do the usual results presentation, but with a slightly shorter Q&A, and after that, Morten here will talk through his initial perspectives following his first couple of months as CEO. After that, we open up for another round of Q&A, so you will get the chance to put your non-quarter related questions to both of them. We aim to be finished in about an hour and a half from now, and with that said, let's get this started, and I hand over to you, Morten.

Thanks, Ann-Sofie, and a warm welcome to you all also from my side. Let's start with a summary, and the very short version of the quarter is that we improved on the most headlines in the income statement. Orders increased by 2%, book-to-bill was positive, and we repeated the record level margin with very strong cash flow. I think these results show the benefits of having a broad industrial segment exposure. We had good developments in the three business areas with close links to the, what I call, the electrification of everything, with the exception being the E-mobility business, where performance is still weak. On the automation side, we are challenged by low volumes in Robotics and Discrete Automation, and especially in Machine Automation, customers remain focused on reducing their inventories.

In total, our revenues improved 2% in the quarter, but if you look at it without RA and E-mobility, it was actually up 7% and 6% year to date. I mentioned the operational EBITA margin, which again reached 19%, and it was great to see the strong contribution from electrification. Congratulations to the team for reaching the 24% margin level, another step in the right direction. There's also reason to celebrate in motion, reaching a new all-time high margin, and process automation delivered another solid plus 15% margin quarter. This is all good, but at the same time, profitability in Robotics and Discrete Automation is low. While Robotics remained in double-digit margin territory, it was a very tough quarter for the Machine Automation division. They are pushing to bring down the break-even level and restore profitability. Timo will talk more about that on the RA slide later on.

We also had further losses in the E-mobility business, which continues to work on its turnaround. Look at it from group level, E-mobility diluted the margin by about 100 basis points in the quarter. So all in all, in my view, a quarter with the positives outweigh the negatives. Cash was good, and you know that we have an ambition of being at least on par with the free cash flow of $3.7 billion we delivered last year. At $2.6 billion year to date, I would say the target is clearly doable. I know that the M&A team in the Measurement and Analytics division in Process Automation has worked very hard this summer, so it was great to see that the acquisition of Födisch Group came through, adding about $55 million of revenues.

The deal makes strategic sense, and it expands our position in advanced industrial emission measurement and analytic solutions, giving really good opportunities for revenue synergies. We also closed the SEAM deal in the Electrification Service division. SEAM is a U.S.-based company, which, through its software platform, provide asset management and advisory services, mostly industrial building markets. It complements our already existing service offering and adds approximately 19 million of revenues. As a last point, I want to welcome Giampiero and Brandon as new business area presidents of Electrification and Motion. Both have long careers with ABB, so I know them well and I've seen their ability to bring a team together towards common goals. I also know that they are both strategic and result-driven, so I do look forward to see the impacts of their leadership.

We had strong momentum in our short cycle orders, which increased by the high single digits. Electrification was the main contributor, with a double-digit growth, but we also had a slight positive in Motion. In the project and system businesses, there is still robust activity, although we were up against some challenging comparables, including the large order of $285 million booked in Process Automation last year. Excluding that booking, our total orders were up by 6%, and in my view, reflecting a solid market environment. Looking at the different customer segments, the areas of data centers, utilities, and infrastructure stood out as the strongest positive, while the most challenging area was the machine builders linked to Discrete Automation. Our revenue of $8.2 billion improved by 2%, driven equally by price and volumes. This was a bit lower than we anticipated going into the quarter.

We find the main deviations in Discrete Automation, where the backlog is diminishing and customers push new orders further out in time. But also in Motion, where we had some deliveries being held as some customers changed their schedule. From a segment perspective, we again highlight the strong demand in data centers, so I thought we would spend some extra time on it. Looking at the data center market, the map changes fast. Some years ago, a co-location site of five-to-ten megawatts would have been considered fairly sizable. Three years ago, 20-to-50 was big.... and now, some co-location can almost be as big as hyperscalers, some hundred or even a thousand megawatts.

Traditionally, we have a strong position with the technically advanced hyperscalers, and we are the strongest in the mission-critical power access area, also known as the gray space, which is where the infrastructure equipment is located. This includes medium- and low-voltage switchgear, protection relays, and critical power protection, but we also play in the white space with, for example, power distribution units. When it comes to transformers and cooling solutions, we work with partners, so what we talk about today is linked to our business area electrification, where the offering is broad and comprises both low- and medium-voltage equipment. Even we are not the market leader in the low-voltage UPS, we see a very strong momentum from an already meaningful level, and momentum is even higher for our medium-voltage UPS HiPerGuard, which is the first medium-voltage UPS product on the market.

Now that data center loads and power consumption are increasing, demands on electricity quality is rising, so our medium-voltage UPS is well positioned, as it covers the entire power system closer to the grid connection point. Overall, in data centers, we have seen a strong order CAGR of 24% during 2019 to 2023, with an even stronger momentum so far this year. Our ability to meet customers' delivery expectations seems to have been above market average, and it appears as we have gained some ground. With higher data processing requirements, we expect the data center market to grow in the double digits in the midterm, and we aim to outgrow the market where we decide to play. Now let's look at the regional developments. Orders in America declined by 6%, but the numbers is impacting by the timing of large booking.

Looking through this, orders actually increased at a double-digit rate, so in general, the U.S. market remains the most robust market for us. EMEA was up by 8%, helped by a very strong quarter in Australia, but also good development in India. China declined year-on-year, but it's only about 2%, so sequentially, China remained broadly stable. Europe was up by 6%, with a very strong improvement in Germany, however, from a low level. In the charts, you see the strong improvement in both earnings and margin. The operational EBITA was up 12%, and we improved the margin by 160 basis points to 19%. It is encouraging to see that this is driven by a strong gross margin, which reached 38.2%, and we had a positive development in three out of four business areas.

But I hand over to you, Timo, to talk more about that.

Thanks, Martin, and welcome to you all from my side as well. Before we move to the business areas, I quickly want to mention the Corporate and Other line, which netted out at -$108 million, including corporate costs of $48 million. The corporate line was somewhat lower than we originally estimated, which had a positive impact of about 30 basis points to the operational EBITA margin. For Q4, we expect normal corporate costs of about $75 million. Our E-mobility business had losses of $60 million for the quarter. We expect the losses to be even a bit higher for Q4, as we look to finalize the restructurings related to the product portfolio transition. For 2025, E-mobility will still be a bit of a drag to overall ABB profitability, but is estimated to be clearly a smaller drag than during 2024.

I also want to mention income from operations, which improved by 4% from last year. The improvement rate was held back by a one-time adverse impact of about $90 million related to a charge linked to E-mobility moving to reduce to a minority ownership in a U.S. subsidiary. The accounting charge had no impact on cash. At this point in time, we could not realize the tax benefit from this charge, which also meant a higher-than-expected tax rate in the quarter, so this combined weighed on earnings per share, which still reached $0.51, up $0.03 from last year, so now let's flip to slide 8 and Electrification, which had a very strong quarter, including 10% order growth with improvements across the three regions.

We have a leading position in the medium voltage space, and here we continue to see high activity in the areas of data centers and utilities. These strong project and systems markets also had somewhat of a positive impact on parts of the low-voltage product business. In addition to data centers and utilities, infrastructure was strong, and it was encouraging to see the overall building segment improve. On the commercial side, we saw good momentum in both U.S. and Europe, but China remains muted. The residential side was overall stable at low level, with our colleagues in the U.S. sounding a bit more optimistic. Europe was broadly stable, and China remains tough. Adding it all up, we had a double-digit growth in our short cycle business, which more than offset the impact from the project business declining from last year's high comparable.

In total, orders once again staying above the $4 billion mark. Switching now to the chart in the middle, and with revenues of $3.9 billion, it was a record quarter, up 10%. All divisions contributed to growth, which was primarily driven by higher volumes, but also by positive pricing. I think it's worth mentioning that on record high revenues, Electrification delivered a positive book-to-bill of 1.03. Earnings and margin also reached new all-time highs. Operational EBITA was up by 26%, with a margin of 24.1%, with volume impacts as the key driver, but also supported by continuous improvement measures. Really well done by the EL team. Looking ahead, in the fourth quarter, we currently expect a mid- to high single-digit growth rate in comparable revenues and the operational EBITA margin to decline sequentially.

Let's move to the Motion business area, where orders came down slightly to $1.8 billion, decreasing 4% on a comparable basis. This was mainly due to timing impacts of project orders, particularly in the rail business. Despite pressure in the China market, Motion's total short-cycle orders remained broadly stable. Looking at the different customer segments, we saw strength in areas of power generation, such as hydro and waste-to-energy. HVAC was also positive, driven by commercial buildings, and on the downside, we saw slower activity in oil and gas, chemicals, and pulp and paper. Shifting now to revenues, which were up by 1% and came in just under $2 billion, i.e., similar to recent quarterly levels.

Pricing had a positive impact, but the pace of converting the backlog to revenues was a bit slower than expected, as some customers slightly changed delivery schedules. On broadly stable revenues, the team increased earnings by 4%, with a record margin of 20.7%, supported by pricing and stringent cost control. For the fourth quarter, we anticipate a low- to mid-single-digit comparable revenue growth year-on-year and the operational EBITA margin to soften sequentially. Turning to slide 10 and Process Automation, which has now had a positive book-to-bill ratio for 16 consecutive quarters. This clearly shows the strength of their offering in electrification, automation, and digitalization for heavy industries, as well as robust market development.

Orders remained on par with recent quarters at $1.8 billion, but declined by 5% from last year, with a large order of $285 million when that was booked. Actually, if we exclude this multi-year contract, orders would have grown by double digits. We see strong momentum in both the traditional and low-carbon power generation segments, as well as marine and ports. Metals and mining improved, while chemicals decreased versus last year. Now, turning to revenues, Process Automation delivered as planned, with revenues growing 6% on a comparable basis. The growth was supported by three out of four divisions and was driven by both volume and slight positive price impact coming from the product business. Strong development in the service business was also helpful.

Process Automation executed on its order backlog with higher gross margin and delivered yet another strong margin of 15.2%, with operational EBITA improving 11%. Looking at our expectations for the fourth quarter, we foresee a flattish growth rate for comparable revenues and the operational EBITA margin to be sequentially down. On slide 11, we turn to Robotics and Discrete Automation, where the two divisions currently face very different market environments. In total, the business area orders dropped by 4% from last year's already low level. Starting with Robotics, where it was encouraging to see a slight growth in orders, although from a low base. This was mainly driven by larger wins in the U.S. logistics sector. Electronics remained challenging, and we saw a drop in EV-related CapEx, partially offset by increased activity related to hybrid vehicles from traditional automotive players.

Orders rose strongly in both the Americas and Europe, but declined at double-digit rate in Asia and Middle East and Africa. Now, looking at Machine Automation, orders were down sharply due to continued slowdown in Discrete Automation demand. We saw machine building customers extend the ongoing inventory adjustments, and from what we see now, this is expected to continue into next year before easing off during the second quarter of 2025 at the latest. Our Machine Automation division is primarily a European business and makes up about one third of the business area's revenues. In this tough environment, the business area revenues dropped by 20%, with the steepest decline in the Machine Automation division, as the decrease in orders directly impacted revenues.

In Robotics, the decline was limited to a single-digit rate as the growth in book-and-bill business only partially offset the lower backlog deliveries. The operational EBITA margin in the Robotics division softened compared to last year, but stayed in double-digit territory, supported by earlier implemented cost savings efforts. Lower production volumes in Machine Automation led to significant underabsorption of fixed costs. In response, extensive cost-saving measures are being activated, including a 25% reduction in headcount, with savings expected to start showing towards the end of the year. For the fourth quarter, for the business area, we expect mid- to high single-digit negative growth in comparable revenues and a slight sequential improvement in the operational EBITA margin. Moving on to slide 12, showing the group operational EBITA bridge.

The impacts from our positive price execution were similar to prior, prior quarters at about 1%, and operational leverage on higher volumes more than offset the adverse effects from a slight increase in spend for R&D and SG&A. All in all, a 12% improvement in operational EBITA, with 160 basis points margin increase. And finally, from me, let's move on to cash now on slide 13. We had another good quarter for cash, delivering a free cash flow of $1.2 billion, which was broadly in line with last year's level. From cash perspective, the impacts from our improved operational performance were offset by a smaller reduction in net working capital, as last year we significantly reduced the buildup caused by supply chain constraints.

This quarter's performance, along with the strong first half of the year, puts us in a good position to at least match last year's result. And with that, I would hand back to Morten.

Thanks, Timo. So let's finish off with the outlook, where we soften the commentary on full-year revenue a bit and nudge up expectation for the margins. We now foresee comparable revenue growth of below 5%, and this is mainly due to the lower-than-expected revenues in the third quarter and the weaker-for-longer market situation in Discrete Automation. For the operational EBITA margin, we now foresee it to be slightly above 18%, reflecting the strong performance year to date and including the pattern of the fourth quarter margin. This year, we expect the sequential margin drop into Q4 to be somewhat steeper than usual, mainly due to corporate cost normalizing and slightly higher losses in E-mobility. This would leave the fourth quarter growth in comparable revenues in the low to mid-single-digit range, and we expect the pattern of a negative book-to-bill to repeat.

All in all, this would make 2024 a record year for ABB, with a positive book-to-bill supporting future revenue generation. So, Ann-Sofie, let's open it up for questions.