ABB LTD Q4 2025 earnings call

Greetings, and welcome to this presentation of ABB's Full Year and Fourth Quarter Results. As usual, we have our CEO, Morten Wierod, here, and now also for the last time in this forum, our CFO, Timo Ihamuotila. I am, Ann-Sofie Nordh, head of Investor Relations. And as per tradition, Morten and Timo will talk through the results, after which we open up for Q&A. So now I'll leave it up to you, Morten, to kick off the presentation with some comments on 2025 as a whole.

Thanks, Ann-Sofie. Yeah, 2025 was our best year yet. We delivered an all-time high financial performance, and we also continue to be recognized with good sustainability ratings. I want to thank and give credit to the team who worked hard to achieve this. Through the year, we saw demand for Electrification and Automation solutions continue its overall strong trend. From a top-line perspective, I would say that we have performed well in a strong market.

Add to that our internal focus on continuous improvements, and putting it all together, we reached new record levels in orders and across most P&L metrics, including an operational EBITA margin of 19%. The margin of 18.2% on income from operations, or EBIT, was only 80 basis points lower, in line with our ambition to keep the gap at about 100 basis points.

The strong order intake resulted in a book-to-bill of 1.11. This leaves us with a record backlog of $25.3 billion to support future revenues. Another highlight is the strong free cash flow of $4.6 billion, as well as the outstanding return on capital employed of 25.3%. We ended the year with a strong balance sheet, with net debt to EBITDA of 0.3. The teams are active on their M&A pipelines, but admittedly, valuations have been demanding in some cases, and we have chosen to step away. I want to make good deals that create long-term value for our shareholders.

So while we want to be active on the portfolio and we have financial headroom, we will continue to keep a firm grip on the calculator when screening deals. So balance sheets allow for M&A, dividend, as well as buybacks. We steadily reward shareholders with an annual increase in dividend. For 2025, we propose a dividend per share of CHF 0.94. If approved, this would be an annual raise of 4 Rappen, which is higher than the two to three in past years. We will also run a new and larger annual buyback program of up to $2 billion.

This is an increase from the 2025 program of up to $1.5 billion, under which we spent about $1.3 billion. So a good utilization in my view, and the equivalent of about 1% of market cap, which adds to the yield of about 1.6% from the proposed dividend. Let's now turn to the fourth quarter, where one highlight was the very strong increase of 32% in comparable orders.

With growth this strong, it is reassuring that it wasn't a one-dimensional driver. Instead, we were up in most segments and had double-digit growth across all business areas, led by Electrification and Automation at the standout levels of 33% and 41%. We continue to improve our operational performance. And to make a long story short, we expanded on most lines in the P&L, generated high cash flow and capital returns. This is the strongest fourth quarter we have delivered so far.

But in the long run, we wouldn't be anything without our leading technology, the foundations for helping our customers. Our medium-voltage power technology is at the forefront of the industry. It puts us in the front row for future data center architecture. Building on this, the Electrification team has extended its partnerships with Applied Digital, and we introduce new power designs for large-scale, AI-ready data centers.

Another future potential demand driver is our cutting-edge direct current and solid-state electronics technology. We were the first in the market introducing a solid-state circuit breaker, the SACE Infinitus. And in the DC field, we run a collaboration with NVIDIA and hyperscalers, supporting their 800-volt DC architecture. This is focused on power solutions needed to create high-efficiency, scalable power delivery for future AI workloads. But why DC technology?

Well, it comes with the customer benefits of higher power density and lower conversion losses. It also requires less raw materials, for example, copper, as the cable can be thinner and fewer compared with alternating current. In our minds, the electrical distribution in future data centers will have much more DC technology combined with traditional AC technology, let's call it beyond 2028, 2030. And in my view, we are very well positioned to lead this evolution.

The transition from AC to DC could be that about 40%-50% of the installed data center's capacity in 2030 is in DC electrical distribution. I earlier talked about M&A, and the Motion team has now closed the acquisition of Gamesa Electric's power electronic business. This fills a gap in our product portfolio. We add power conversion products, such as certain wind converters, targeting industrial battery energy storage system, as well as utility-scale solar inverters. I keep saying that the best is still to come for ABB. And to back it up, we have updated our long-term financial targets.

So far, we have a good track record for delivering on our commitments. I expect this to continue also for these new targets, which I see as both ambitious and realistic. Starting with comparable growth, the 5%-7% range is unchanged. This is a long-term through-cycle target, with a corridor as an average of what we will deliver over the next, let's call it, 8-10 years. This means that we can be above or below in individual years, but over the time, the average corridor is what you should expect from us. On top of this, we look to add an average 1%-2% of acquired growth.

Turning to the raised margin target, we now aim to run operational EBITA margin in the range of 18%-22%. So from the 2025 level, which is the best ABB has delivered so far, we see further upside of 300 basis points. The new higher margin range also means that worst case, should we face a softer cycle, we will protect margin to only 100 basis points below the record 2025 level.

Thanks, Morten. Let's take a look at what happened in the different business areas, starting with Electrification. I have to say that the order level of $5.3 billion is a job well done. The market trend for Electrification of things is buoyant, and the team performs well in this very strong market. The data center segment stood out with the timing of some large project orders, adding to an already strong trend. These larger bookings at the +100 million level totaled about $600 million. Looking ahead, the project pipeline remains good, and as Morten mentioned, we remain confident about the market.

In such a strong environment, it is important that we remain honest with our customers, careful not to overpromise on our ability to deliver. This is key in our customer conversations. But Electrification is not all about data centers. Orders increased at a low double-digit rate, also excluding data centers. I would mention a continued strong customer activity in utilities, as well as for land-based infrastructure. Buildings is the biggest single segment and was overall positive. This is net of support from the commercial business, while residential remains challenging.

Turning to revenues, the chart in the middle shows the record high level of $4.7 billion. The 12% comparable growth was primarily due to higher volumes, with a positive development in all divisions, and we were up in all regions. So while revenues were all-time high, Electrification still reached a positive book-to-bill of 1.13, increasing the backlog by 21% to $9.4 billion. Operational EBITA was up by 23% to $1.1 billion, supported mainly by operational leverage on higher volumes, as well as by efficiency gains.

These positives more than offset growth-related higher spend on R&D and SG&A, but also inflation linked to tariffs, as well as rising input costs from raw materials. The team is taking mitigating actions to offset higher commodity prices. And considering timing between price action and full realization, the sequential margin improvement into the first quarter may be a bit lower than what we have seen in the last few years. But with the expected Q1 comparable revenue growth at a high single- to low double-digit rate, we should still see operational EBITA margin increase year-on-year.

Now, let's turn to Motion, where comparable orders were up by 13% and total orders reached $2.2 billion, in line with recent quarters. Just like in Electrification, there was contribution across the project, service, and short cycle businesses. Looking at the different customer segments, I would highlight on the positive side, areas like HVAC, linked to commercial buildings. I would also mention power generation, which benefits from grid modernization and distributed energy systems.

On the more muted side of things, there are process industry segments of pulp and paper, and also chemicals, where however, orders were up in this specific quarter. In the revenues chart, you see that Motion delivered a new all-time high. The 6% comparable growth was mainly due to higher volumes, with some further contribution from price. We also added about 1% from M&A, which includes the closing of the Gamesa Electric deal in early December. On an annual basis, this adds about $170 million to Motion. And all included, revenues reached $2.3 billion, leaving book-to-bill at slightly negative 0.97.

As most of you are familiar with, we have a pattern of a negative book-to-bill in the fourth quarter. Operational EBITDA improved by 8% to $412 million. The margin, however, was down by 40 basis points to 18.3%. This was mainly down to two factors, with broadly similar dilutive impacts. One being that we have some operational inefficiencies in the recently formed High Power division. It is taking some time to get the new setup fully oiled and up to speed. The team is on it, but it will most likely take a few quarters to get fully resolved.

The second point to mention is the margin dilution from the acquired Gamesa business I just mentioned. In this quarter, with only one month inclusion, it weighed on margin by about 20 basis points. The business is currently making a small loss, and we expect it to be dilutive for 2026 as a whole. Our plans allow for a couple of years to bring profitability to double-digit as we embed the offering into our broad leading market reach. It should also add cross-divisional benefits with potential for the services business.

For the first quarter, we anticipate comparable revenue growth towards the high single-digit level and operational EBITDA margin to improve slightly from the fourth quarter. Let's then turn to Automation, where this was the first quarter in the new structural setup with Machine Automation division now part of the business area. Automation also delivered a fantastic order inflow. You see in the chart on the left that the $2.8 billion, up by a comparable 41%, is on par with the similarly high Q2.

This has clearly been a strong year for Automation orders. Like for Electrification in Q4, we had some large bookings above the $100 million mark. These were linked to the marine and port segments and contributed to a total of close to $600 million. In addition to strong marine and ports, I would mention oil and gas as a generally solid market, although orders declined in this specific quarter. There was also an increased activity among nuclear customers, albeit a small part of the total.

Machine builders remains a challenging area, but due to the low comparable from last year, orders increased sharply. Lastly, mining orders were up in what we otherwise continue to see as a bit of a muted segment. Turning to revenues, comparable growth was stronger than expected at 9%. Execution of the backlog, as well as good deliveries in service and short cycle businesses, all supported revenues to the record $2.2 billion. Operational EBITDA was up by 27% to $311 million, and key lever to the higher profitability was the gross margin increase of 140 basis points.

This was due to leverage on higher volumes, some positive pricing, and the team delivering productivity enhancements. Add to that a stringent management of SG&A, and we arrive at the 150 basis points increase in operational EBITDA margin to 13.9%. Looking at the first quarter, we expect Automation's comparable revenues to improve at broadly a mid-single-digit range, and operational EBITDA margin should improve slightly year-on-year. Now, let's move on to cash flow, which was another highlight of the quarter.

Thanks, Timo. Now, let's finish off with the outlook. We expect to continue to perform well in a strong market, and foresee another year with a positive book-to-bill. Comparable revenue growth should be in the range of 6%-9%, and we aim for a slight increase in operational EBITA margin, even when excluding the real estate gain in the first quarter of 2026. For the first quarter, we expect comparable revenue growth in the range from 7%-10%, and the operational EBITA margin should increase year-on-year, excluding the real estate gains.

Last year, the Q1 margin was supported by about 190 basis points to 20.3%. So excluding the gain, the margin was 18.4%. So now, Ann-Sofie, let's open up for questions.