ABB LTD Q1 2025 earnings call

Greetings and welcome to this presentation of ABB's Q1 results. Next to me here, I have our CEO, Morten Wierod, and our CFO, Timo Ihamuotila. And I'm Ann-Sofie Nordh, Head of Investor Relations. As per usual, Morten and Timo will talk through the results, and after that, we focus on today's announcement of portfolio change. Today, the presentation will be a little bit longer than we normally have before we open up for the Q&A. With that said, I ask you, Morten, to kick off the presentation.

Thanks, Ann-Sofie. A warm welcome also from my side. I would say that we had a strong start to the year. The team did a good job at staying focused in what has been a quarter with intense news flow. I would guess that we all have had tariffs on our radar screens. If I was to pick up a few highlights from the quarter, those would be: I mean, first of all, market activity was high, and it was good to see that demand was strong throughout the quarter, with a good finish in March.

In total, we increased comparable orders by 5% from last year. Secondly, we beat our own expectation for operational EBITDA margin in all business areas. On top of this, our margin got an extra boost from a one-timer, which contributed 170 basis points to the margin of 20.2%.

The third point I want to mention is the free cash flow of $652 million. This is good for a Q1, which usually is a softer period for our cash generation. It puts us now in a good position to improve our annual free cash flow from the $3.9 billion we generated last year. We also made good progress towards our sustainability targets. My final point is that we continue to be active with the business portfolio.

In early March, the team in Smart Buildings closed the acquisition of the Siemens wiring accessory business in China. This adds to our already strong product portfolio. Importantly, it gives us additional market reach through our distribution network across 230 cities. The deals add about $150 million in sales, and it is margin accretive.

Today, we also announced our plan to spin off the robotics division as a separately listed company. In our view, this change will support value creation for both companies. As Ann-Sofie mentioned already, we will cover this separately later on. As part of the annual reporting suite, we published our sustainability statement, and we made good progress in 2024. We are already close to fulfilling our 2030 targets for 80% reduction of CO2 emissions. At the end of 2024, we were down 78% from the 2019 base level. It

is not only about us. I'm proud to say that with our technology, we helped our customers avoid 66 megatons of emissions with our products sold in 2024. Over the last three years, we accumulated nearly 205 megatons of avoided customer emissions. I also want to mention safety, as this is something we cover in all our internal reviews.

Keeping our people safe is an important KPI that we follow carefully. Zero incidents is always the target. It is good to see that we continue to track on a low score, and we achieved 0.15 for 2024. Let's take a look at the market developments. The short version is that orders were stable or up in most of our customer segments. Like I mentioned, comparable orders were up by 5%. This was driven by mid-single-digit growth in our short-cycle orders, which improved in all business areas.

We also had 11% growth in the service business, but we had a slightly lower contribution from large orders. Some of the stronger areas were utilities, marine, ports, commercial buildings, and most of the process-related areas, although chemicals and pulp and paper are generally more muted segments.

Our robotics business had increased orders from the automotive segment, and our paint technology is the best on the market, and we had customers choosing to remain with us as they expanded their international footprint. One can say we travel with the customer. Data center is usually a focus topic, and there has been quite some news flow in Q1. The general sentiment remains very strong. We see some customers even accelerating their investments, even if some slower activity from one of the hyperscalers is noted in this quarter.

Rail remains a strong area. One example from our Traction business is the collaboration with Stadler in the U.S. We will supply converters and Pro Series batteries for train sets in Illinois and California as the U.S. moves towards greener rail transport. Even if the market is strong, orders in rail dropped from a high large order comparable.

Switching to the revenue chart, the $7.9 billion and 3% comparable growth was a bit below our original expectation. We did not convert the backlog or recent short-cycle orders as quickly as expected. Volumes were the larger driver to growth, with some added contribution from positive pricing. Turning to look at the different geographies, we were actually up in all three regions. The Americans, with good support from the U.S., was again the main growth engine and increased by 11%.

Asia, Middle East, Africa improved by 4%, and China turned to positive order growth after 10 quarters in decline. All business areas contributed to the China growth of 13%. Europe was up 1% with a mixed picture between the countries. Looking at our large markets, Germany declined, while, for example, Italy improved. Uncertainty triggered by the tariff news flow has put focus on footprint and operational setup between regions.

Thank you, Morten. Welcome to you all from my side as well. Let's now talk through the different business areas, starting with Electrification. The EL team keeps delivering new records. In Q1, they achieved a new all-time high orders of $4.4 billion. This is up 2% on a comparable basis from the previous high, a testament to strong underlying markets. Customer activity was stable to positive in most customer segments. This includes our two largest segments of utilities and buildings.

Demand in buildings continues to be driven by the commercial market outside of China. The residential market was overall stable, although the China market is still weak. Morten talked about the data center segment earlier and the slower activity we saw from one of the hyperscalers. I want to emphasize that outside of this specific event, we still see a very strong data center market.

If we exclude this one hyperscaler, orders in data centers increased at mid-teen space. The base is now quite sizable, as we had data center orders of about $2.5 billion last year. Generally, it is still a very strong general environment in this tech segment. Turning now to revenues, Electrification delivered 6% comparable growth with contribution from virtually all divisions. Volumes were driven by conversion of the order backlog related to medium voltage and power protection.

Also, the short-cycle business improved by mid-single digit. The profit chart on the right side shows the steady improvement trend Electrification has achieved. At this quarter, there was no exception. Operational EBITDA was up by 7% to $886 million, with a margin of 23.2%. The gains from higher volumes and operational efficiencies more than offset higher expenses mainly related to SG&A.

All in all, a very strong quarter for Electrification, adding to our confidence for the year. Now, looking into the Q2, we currently expect low double-digit growth in comparable revenues and the operational EBITDA margin to improve slightly from last year. Now, turning to Motion, which delivered another quarter with order intake above $2 billion. That said, lower large order bookings, mainly in Traction division, triggered a decline from last year's record high level.

The strongest growth was noted in the service division, while the short cycle improved slightly versus the prior year. We saw favorable order development in HVAC for commercial buildings, as well as in power generation. The softer areas included the process-related segments of oil and gas, chemicals, and food and beverage. Rail also declined, but this was linked to the larger order comparable I just mentioned.

Shifting now to revenues, which was supported by both higher volumes and a positive price impact. The long-cycle divisions improved as they executed on their high order backlogs, even if this was slightly below our original expectation. This improvement was partly offset by a decline in the service division, while the short-cycle areas were broadly stable. In total, this sums up to an increase of 3% in comparable revenues to just over $1.8 billion.

The positive price development, coupled with continued operational improvements, contributed to a strong margin improvement of 110 basis points to 19.6%. Most divisions improved their profitability year-on-year. For the Q2, we anticipate comparable revenue growth in the mid-single digit range and the operational EBITDA margin to remain broadly stable year-on-year.

In Process Automation, we saw a continued healthy market environment, and orders came in at the high level of $2 billion, increasing 23% year-on-year. The PA team delivered yet another quarter with a positive book-to-bill, at this time 1.24, and the backlog is now $8.1 billion. The marine and port segments continue to be growth drivers. In this segment, we are mainly exposed to passenger vessels like cruise and specialized vessels, which could, for example, include icebreakers or coast guard.

Port automation also continued to see strong underlying demand. As for the other segments, we saw a stable to positive order development in most of the energy and process-related industries. The business climate, however, remains more muted in chemical, pulp and paper, and mining. Revenues got off to a good start and increased by 5% on a comparable basis.

The team executed on their steadily increasing order backlog with added support from pricing. The team has done a really good job on quality of revenues, as the order backlog gross margin has been increasing. As they now execute on this backlog, we see this supporting profitability in the business area. The contribution from the backlog more than offset the impact from lower volumes in the product division. All in all, it resulted in a new record operational EBITDA margin of 15.8%, improving 20 basis points year-on-year.

Looking at our expectation for the Q2, we foresee comparable revenues to improve in the mid-single digit range and the operational EBITDA margin to be stable or slightly up year-on-year. If we flip now to Robotics & Discrete Automation, it was good to see that this time both divisions contributed to the strong order growth of 17%.

Thanks, Timo. With that, let's talk about today's portfolio of announcements. Our plan is to spin off the robotics division as a separately listed company. We start these preparations now, and we'll work towards a proposal for the 2026 AGM. If all goes to plan, we will distribute the business to shareholders as a dividend in kind, meaning shareholders in ABB will receive shares in the robotics company in proportion to their existing holding.

We plan for the robotics company to start trading during the Q2 of 2026, but we have not yet decided where the listing will take place. We are now looking at different alternatives, including Sweden and Switzerland. Why are we doing this? The prerequisite is, of course, that we think that it will benefit value creation in both companies.

Robotics is a strong performer in its industry, and this will become more transparent, and we think it will be rewarded for its strong position and performance as a pure-play robotics company. As you see in the chart to the left, robotics represents 7% of ABB Group revenues and 5% of earnings. I should also mention that numbers on these slides are pre-carve-out estimates. Some balance sheet numbers may change for the standalone entity.

Robotics performance profile is different versus the three larger business areas we have, and we believe it will benefit from being evaluated on its own merits instead of competing over capital allocation within ABB. Also, while it's a strong contender in its industry, there are limited synergies with other businesses in ABB. It almost already has a standalone profile, but without getting the full benefits.

Last year, robotics generated about $2.3 billion in revenues, and in my view, they have proven themselves under the ABB-way decentralized operating model. They have delivered a double-digit margin in most quarters since 2019, a strong achievement in what has been an unusually volatile market. First, it was COVID, when they had to shut down the hub in China.

Then the component shortages with the significant pre-buys, followed by the normalization periods. Now, they have shown order growth in the last four quarters. They've also been active on their portfolio. The low-margin system business has been exited. They now have the broadest mechatronics portfolio after expanding with Cobot & AMR on top of the already most advanced robotic offering with its control and software platform.

ABB Robotics is well positioned to help customers improve productivity and flexibility to solve operational challenges such as labor shortages and the need to operate more sustainably. I mentioned earlier the double-digit operational EBITDA margin. It is good to see that this has been supported by a strong gross margin improvement. Since 2022, the robotics gross margin is up by 600 basis points. Free cash flow margin is at the average of 10% since 2019, and the business is well invested.

They have state-of-the-art hubs for manufacturing and R&D in China and the U.S. We recently started the construction for a major upgrade of the European hub in Sweden. They have spent 5%-6% of revenues on R&D and launched its unique OmniCore platform last year, and their Picker technology is a good example of their strong AI-based solutions.

All in all, we think a listing of the robotics business will support its ability to create customer value, growth, and attract talent. We also think it will benefit ABB, which would consist of three business areas with sales and technology synergies. Why do I say three business areas? We will move the Machine Automation business to be a division in Process Automation to build on their software and control synergies, for example, towards hybrid industries.

While robotics is only 7% of Group revenues, this portfolio change will have a slight positive impact on ABB's performance. The main target is to allow for both companies to optimize this value creation. We start working towards this now, and we'll come back with more details in due course and in good time before the AGM in 2026. Finally, let's finish off with the outlook.

We leave our 2025 outlook unchanged but acknowledge the increased uncertainty for the global business environment. We still expect a positive book-to-bill, and we see comparable revenue growth in the mid-single digit range, and we expect to further improve the operational EBITDA margin from last year. Since we had a positive one-timer in the Q1, I want to mention that the margin outlook for the year is supported by improvements in our businesses. It's not only driven by one-off gains.

For the Q2, we foresee comparable growth in the mid-single digit range and the operational EBITDA margin to remain broadly stable with 19% last year. Some of you may say that that stable margin development is underwhelming, but actually, it means we need to improve our business results in Q2 2025 to offset the positive impact of 30 basis points from a non-repeat last year.