ABB LTD Q4 2024 earnings call

Greetings to you all, and welcome to this presentation of ABB's fourth quarter results. I have our CEO, Morten Wierod, and our CFO, Timo Ihamuotila, here next to me. And I'm Ann-Sofie Nordh, Head of Investor Relations. Morten and Timo will take you through the results presentation, after which we'll open for Q&A. So, with that said, and without further ado, Morten, would you kick it off?

Thanks, Ann-Sofie, and a warm welcome also from my side. Let's start by taking a look at the full year 2024, which was a new record year for us in many ways. We improved on most of our financial headlines, and on the sustainability side, one of the highlights was to get our Scope 1, 2, and 3 targets approved by the SBTi. Taking a high-level markets perspective, I would say it was a continued, robust trading environment in three out of our four business areas. Orders in our short-cycle businesses improved in the mid-single-digit range, which offset the impact from large orders softening from last year's high level. Electrification was the big growth engine, and I think it is fair to say that both robotics and discrete automation, as well as E-mobility, fared worse than what we originally expected.

From here on, these two should be less of a drag on group performance. Despite some of our businesses not yet delivering to their full potential, the operational EBITDA was up by 10%. We took another step towards the high end of our margin target range, as we achieved a new record level of 18.1%. We did this with strong support from higher gross margin, which reached the all-time high of 37.4%. I'm pleased about the good progress we're making here. Earnings per share was up by 6%, and I know that Timo is happy about us delivering on our ambition to improve free cash flow. The CHF 3.9 billion corresponds to a free cash flow margin of 12%, making it the second consecutive year at this double-digit level. Cash flow should be good also going forward. Another strong point for us is ROCE at 22.9%.

We will become more transparent with Return on Capital Employed, and Timo will talk about that later on. Towards the end of the year, we also got a better momentum for M&A. Based on the deals we have already announced but not closed, we set ourselves up to approach our long-term target range for acquired growth in 2025. Our strong balance sheet supports more acquisition, and we want to utilize it. All in all, it was a good year for ABB, and the board has proposed a dividend increase of three Rappen to CHF 0.9. The cash distribution is in addition to the CHF 1 billion we have used for share buybacks in 2024. Today, we announced a new and larger program of up to CHF 1.5 billion, which we should start to execute in the early days of February.

To finish off our 2024, I want to say that I'm proud of what we have as a team have accomplished. We stayed true to our strategy, including the ABB Way model, and we are still making our operations more efficient and transparent as we increase accountability even further down in our organization. We continuously look at how we can optimize our business portfolio, which is positioned at the core of the energy transition, as well as energy and automation efficiency, and I look forward to 2025, when I'm confident we will yet again deliver some new records, so let's now look at the fourth quarter in isolation, which, in my view, represents a good ending to the year. The strong growth in short-cycle orders more than offset a lower level of incoming large orders, for which the base was really high.

In total, our comparable orders increased by 7%, driven by a stellar performance in electrification. Robotics and discrete automation turned a corner by delivering positive order growth, despite an adverse impact from the team having gone back to customers to reconfirm the backlog. Timo will talk through the details on the RI slide later on. But without these debookings, our group orders would have been two percentage points higher. Looking at the income statement, you see that we improved on virtually all lines. The 5% comparable revenue growth was mainly driven by higher volume, but also by positive pricing of about 1%. This generated a good drop-through to operational EBITDA driven by a higher gross margin. I'll come back to that on the earnings slide. Some of you may remember that I mentioned our brand positioning.

We have now launched our new tagline, "Engineered to Outrun," which I think nicely represents who we are and what we do. We help industries outrun leaner and cleaner. To me, it articulates what we want to be known for in the minds of our customers. This is a long-term project, but assuming we do it right, we should have a commercial upside from a more focused industrial positioning. And again, this does not mean a higher spend. We will simply be more focused. At the Q3 presentation, I talked about data centers and how we are first in the market with a medium-voltage switchgear. There's been a lot of AI-related news flow recently. Our objective is to make data centers more CapEx and energy efficient, and I am sure that this will continue to be a focus point for our customers. We invest to innovate to create customer value.

We are now receiving orders for the so-called HiPerGuard medium-voltage UPS system. This brings ever better UPS solutions when the server power rack requirements go up. This means that we also can help customers to reduce their CapEx spend by up to 30%, reduce complexity, and become more energy efficient in their next generation of data centers design. I look forward to following the team's progress in this area. As you can see here in the chart to the left, the pattern suggests a softer order intake towards the end of the year, and book-to-bill tends to be negative in our fourth quarters. So also this year at 0.94. In my view, it was a solid order quarter, which adds to my confidence for a positive book-to-bill for the full year of 2025.

It was good to see that despite the second highest base ever for large orders, we managed to deliver comparable order growth of 7% to $8.1 billion. This was driven by a strong growth in our short-cycle businesses, which delivered a low double-digit improvement from last year. It improved in three out of four business areas, with electrification being the outperformer. The short version is that the trading environment remained robust in most customer segments, except for weaknesses linked to discrete automation and the E-mobility businesses. Looking a bit deeper into the details, both data centers and utilities stand out on the strong side. Order growth was good also with the building segment, as the persistent weakness in China was more than offset by other regions. Automotive is still a challenge for our robotics business, but this quarter, it was actually a positive on orders.

Transport and infrastructure are generally solid, although marine and rail were down due to the timing of large orders. If we now switch to the revenue chart, the CHF 8.6 billion we delivered was supported by backlog execution, as well as conversion of recent uptick in short-cycle orders. Notably, the CHF 8.6 billion is the highest quarterly level ever from ABB, and it was up by 5% on a comparable basis, with a positive development in three out of our four business areas. Now, looking at the regional orders, we were up in all three regions. China continues to be a challenge in several customer segments, but the -11% you see stated on this slide is impacted by the backlog adjustments in robotics and discrete automation. Excluding this, China is down by the more limited 1%.

But as a total, Asia-Middle East Africa was up by 4%, with weakness in China offset by strength elsewhere in the region. The Americas improved by 7% and continue to be the most robust area driven by the US, where, however, quarterly growth was limited to 1% due to last year's high base. Europe was up by 9%, with a strong improvement in many of the larger markets, including Germany, although from a low level. The seasonal pattern is visible also in the earnings and margin chart, but importantly, it shows that we continue to improve performance. We are making further progress on the gross margin. The 35.5% is up by 100 basis points from last year, and we offset the intentionally higher R&D spend while we managed to keep SG&A more or less stable.

The underlying corporate and other costs of about CHF 60 million were slightly lower than the CHF 75 million we had expected, as we benefited from a settlement in a non-core project. Operational EBITDA was up by 8%, and we improved the margin by 40 basis points to 16.7%. This means that we delivered the highest fourth-quarter margin on record, and as I mentioned earlier, we achieved a new all-time high for 2024 as a whole. The way I see it, we are in a good position to nudge the margin north also in 2025. Now I'll hand over to you, Timo, to give you some more color on the different business areas.

Thanks, Morten, and welcome to you all from my side as well. We start with electrification, where comparable orders were up by as much as 16%. The quality of this order growth was, in my view, underpinned by the fact that we had improvements across most of the divisions, as well as across regions. Data centers and utilities continue to be strong areas, but the building segment also contributed in a good way, where we on the commercial side saw good momentum in both the U.S. and Europe. In the residential area, it was broadly stable at low levels outside of China, which is persistently weak for both residential and commercial. Now, if you look at the chart in the middle, you'll see that the electrification achieved another milestone. With the 11% comparable revenue growth, they for the first time surpassed quarterly revenues of more than $4 billion.

All divisions contributed with higher revenues, which came primarily from higher volumes, with some additional support from price. The outcome was even a bit better than our expectations on back of higher project deliveries. Electrification improved operational EBITDA by 19% to CHF 863 million, resulting in a margin of 21.3%. The gains from higher volumes and price more than offset higher expenses, mainly related to R&D, but also for SG&A, as well as the stronger than expected adverse revenue mix towards project business. Looking into the first quarter, we currently expect a mid- to high-single-digit growth rate in comparable revenues and the operational EBITDA margin to remain broadly stable or slightly increased from last year. Let's then flip to motion, where orders remained around the CHF 1.9 billion level, down 3% on comparable basis.

The short-cycle orders improved, but this was offset by lower project and system-related orders, where the comparable was one of the highest ever. We saw favorable order development in commercial buildings, HVAC, as well as in water and wastewater and 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 mainly linked to the large order comparable I just mentioned. In the revenue chart, you see that Motion comparable revenues was up by 6%, resulting in a record quarter for Motion for the first time above CHF 2 billion. Most divisions saw positive developments supported mainly by strong backlog execution, resulting in higher volumes, but also by some positive pricing. The higher volumes, as well as operational improvements, contributed to a strong margin improvement of 210 basis points to 18.7%.

I should mention that the part of the improvement relates to the one-time product quality cost, which weighed on last year's margin by approximately 60 basis points. But importantly, the higher profitability is more an outcome of benefits from higher comparable revenues and efficiencies, which clearly offset the higher spend in R&D and SG&A. For the first quarter, we anticipate a mid to high single-digit comparable revenue growth and the operational EBITDA margin to slightly improve year-on-year. Turning now to slide 11 and process automation, where the market environment is solid. Total orders remained broadly stable despite the tough large order base. This resulted in PA continuing their streak of positive book-to-bill for now 17th straight quarter. The underlying trading environment is still robust in the marine and port segment, although this time quarterly orders declined due to a large CHF 150 million booking last year.

A stable to positive order development was noted in most of the energy and process industry-related segments, with weakness noted primarily in chemicals. Process automation improved comparable revenues by 4% due mainly to execution of the large order backlog, which added support from pricing in the product business and good service growth. The backlog execution comes through at the higher gross margin. This helped drive operational EBITDA up by 8 percentage points from last year, with a 40 basis points margin improvement to 14.4%. Looking at our expectations for the first quarter, we foresee comparable revenues to improve in the mid single-digit range and the operational EBITDA margin to be broadly stable year-on-year. Now we turn to robotics and discrete automation, where orders turned to positive growth after eight consecutive quarters in decline.

It has been an unusually turbulent time for RDA when markets have corrected after a significant pre-buy period. We have now completed a thorough analysis of the backlog, which included going back to customers to reconfirm status. This triggered debookings of about CHF 130 million in what is now a reconfirmed order book. The majority of the impact was linked to Machine Automation and China and reduced the business area's comparable order growth by 24%. With that said, excluding the debookings, the strong year-on-year order growth could appear as a very big improvement in the underlying demand. I would comment that it is more linked to last year's very low base, as we have not seen a big change in the market environment versus what we saw in the third quarter in either of the divisions.

Looking beyond the backlog adjustment, the robotics division saw positive order development in the automotive sector. The segment remains challenging, but in this quarter, we benefited from ramp-ups in hybrids as well as by some replacement CapEx. Other positives were the areas of general industry and food and beverage, while electronics and metals were muted. In Machine Automation, customers remained focused on inventory management, and we stick to our earlier prediction that this will ease toward the end of the first quarter or at latest during Q2. But we expect a slight sequential order increase in both divisions in the first quarter of 2025, when excluding the backlog correction we have just talked about. Moving now to revenues, the robotics division executed on their backlog, resulting in a low double-digit growth rate for comparable revenues. This was, however, clearly offset by significantly lower volumes in Machine Automation.

The previously announced cost savings measures in Machine Automation are increasingly coming through, but did not compensate for the lower production volumes. So while robotics delivered a double-digit margin, the total operational EBITDA almost halved with the margin at 7.9%. For RA in the first quarter, we expect the absolute revenues and operational EBITDA margin to remain broadly stable versus Q4. We ended the year by delivering free cash flow of $1.3 billion in the fourth quarter. This, in combination with the strong cash generation from the first nine months, resulted in the annual free cash flow of CHF 3.9 billion, meaning we delivered on our ambition to step up from last year. As Morten mentioned, cash flow should be good also in 2025, and I see it being in the similar to 24 level. Looking at the fourth quarter in separation, the free cash flow decreased by approximately $420 million.

The improvement in operational performance was offset by less reduction in net working capital versus previous year. Net working capital management has been an area of strong internal focus this year, and I was very pleased to see that we were able to bring the net working capital as a percentage of revenues down to 8.6%. This actually is in line with where we were prior to the supply chain crisis, a job really well done by the team. Taking a look at the ROCE development, you see in the chart that the 22.9% we reached is again clearly above our target of greater than 18%. ROCE improved by 180 basis points, driven mainly by better operational performance, but also by our focus on net working capital. Overall, the improved ROCE is a good indicator that we continue to improve ABB's long-term performance and are really operating at the best-in-class level.

Before I hand back to Morten, I want to mention some reporting changes that will come into effect as from Q1. With these changes, we want to more closely align our reporting with our day-to-day operations, with the aim to drive operational focus and improvement on our gross margin, net working capital, and return on capital employed. Firstly, we will be reclassifying certain IT costs from gross margin and will report them based on the nature of the system rather than by headcount allocation. This will allow us to move more closely to track gross margin and costs directly linked to the business and hold our functions accountable for the cost associated with their infrastructure. Secondly, to take another step in our efforts on capital efficiency, we are introducing a new measure focused purely on trade net working capital.

It means that this KPI will include only trade receivables and payables, contract balances, and accrued liabilities. This will be the ratio that we will present as a percentage of revenue, and we will use the fourth quarter average to smoothen the seasonality of the net working capital, which tends to be front-end loaded in the year. Lastly, we will better align the ROCE calculation with operations by using the estimated operational tax rate and also for this KPI-based calculation on the fourth quarter average to remove seasonality. All restated and new numbers will be on the IR website in February. With that, I will hand back over to you, Morten.

Thanks, Timo. Let's finish off the outlook, and I've already alluded to a positive development in 2025.

We acknowledge that there are geopolitical market-related uncertainties, and at the moment, the strong US dollar puts some pressure on numbers. But from what we see right now, we expect a positive book-to-bill comparable revenue growth in the mid single-digit range and the operational EBITDA margin to improve from last year. For the first quarter, we foresee growth for comparable revenues in the mid single-digit range and operational EBITDA margin to remain broadly stable year-on-year. So now, Ann-Sofie, let's open up for questions.

Yes, let's do so. And 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, please remember to mute the webcast as your line is open and limit it to one question, please. This way, we allow for as many of you as possible to be heard.

You can also put questions through the online tool in the webcast, and I will then voice them over from here. With that, it's time for Q&As. But before we take the first question, I just want to let you know that Timo, as you see, will not be able to join us for the Q&A session due to personal reasons. So today, it's you and me, Morten. We're set. Indeed. And with that said, we open up the line for the first question, and it should come from Martin at Citi. Are you with us, Martin?