ABB LTD Q3 2025 earnings call

Greetings and welcome to this presentation of ABB's third quarter results. Next to me here is our CEO, Morten Wierod, and our CFO, Timo Ihamuotila. I'm Ann-Sofie Nordh, Head of the Investor Relations team. Morten and Timo will talk through the results, and we will, as usual, open up for Q&A. With that said, I hand over to you, Morten, to kick off the presentation.

Thanks, Ann-Sofie. Welcome also from my side. Summarizing the trading climate in the third quarter, I would say that this was very similar to what we saw in the second quarter. When I talk to our business leaders and when I meet with our customers, there are no material differences in what they say and do. Despite continued news flow and uncertainty related to U.S. tariffs, our customers continue to invest behind electrical, power, and automation. There are, of course, differences between segments. Some are very strong and some still challenging, and I will come back to these details. Overall, we see good demand for our offering. The high order level with 9% growth is one key highlight in the quarter. Another strong point for me is the free cash flow of $1.6 billion. In total, I'm pleased with the quarter. We keep moving ABB in a positive direction.

We improved on virtually all lines of the income statement: strong revenue growth, improved earnings, margin, and EPS. I want to give credit to the team for a job really well done. I also want to mention the Robotics announcement. Last week, we informed about our decision to sell the Robotics division to SoftBank Group. This is a change from our original plan to spin the business as a separately listed company. First, let's focus on the quarter and then come back to Robotics at the end. Let's look at what drove our orders to increase by a comparable 9%, reaching $9.1 billion. This time, all four business areas improved comparable orders in the range of 4%-17%. We had a stable to positive development in most of the customer segments, and we were up in our service, short, and long-cycle businesses.

I mentioned that there are differences between the customer segments. Data centers continue to stand out on the strong side, and orders increased at a double-digit pace. The utilities market remains strong, and land transport infrastructure continues to benefit from upgrades of electrical equipment. The building segment was positive, helped by the commercial market. In the energy-related area, there was a positive development in the Oil and Gas segment. The demand in renewables declined, but we see increased activity in our nuclear business. Similar to previous quarters, the process industry area was slow, and within discrete automation, it is still challenging in the machine builders' segment. That said, we saw a sharp order growth in the quarter, but this is more linked to the low comparable when customers were holding back orders after earlier pre-buys. Robotics orders were broadly stable.

If you look at the right-hand chart, you see that revenues hit an all-time high of $9.1 billion, up 9% like for like. This was supported by all business areas, with improvements in both the short and long-cycle businesses, as well as in service. In total, revenues were high, but orders even higher. With book-to-bill at $1.01 billion, we add to the already record-high order backlog, which amounts to $25.1 billion. If we instead look at the order intake from a geographical perspective, the Americas was again the main growth engine and increased by 19% like for like. Looking specifically at the U.S. market, orders were up 27%. This high number includes some large bookings, but the improvement was a strong 9% also for base orders. Europe was up by 9%, and there was a mixed picture between countries.

If you look at Germany, our largest market in Europe, it declined by 4% due to the impact of large bookings from last year. However, base orders in Germany were virtually stable to somewhat positive in all business areas. EMEA declined by 1%, hampered by weakness in China. The general market in India remains strong, although order growth in this quarter was impacted by large bookings last year. Base orders were up 9% also in India. Backed by higher revenues, we improved operational EBITDA by 12%, and I'm pleased that we start to build a pattern of gross margin above the 40% mark. We have become more efficient in our execution, and as we get higher volumes and some positive pricing, we more than offset the increased spend for R&D and SG&A.

You have heard me talk about our local-for-local footprint, and as we have mentioned before, our setup has left tariff-related impacts limited to the tens of millions. All in all, we improved operational EBITDA margin by 20 basis points to 19.2%, which was even a bit better than what we originally expected. It was good to see that our improved business results more than offset the higher corporate and other costs. The corporate line was higher than what we guided for, and this is due to FX hedges on intracompany transactions. Looking at the underlying corporate cost, it was as expected. E-mobility reported a loss of $26 million, which is a step in the right direction, and we expect them to sequentially improve going into Q4. All in all, we improved our net results, and EPS was up by 29% to $0.66.

I'm pleased with the third quarter, and now I hand over to you, Timo.

Thanks, Morten. Since we are on the topic of earnings, and you also touched on the sale of Robotics, I will just quickly mention the upcoming impacts to our reporting. From Q4 2025 onwards, we will report the robotics business in discontinued operations. This change triggers some stranded costs until the deal closes. The net effect, however, is close to margin neutral, but let's still go through some specifics. My first point is that in the last 12 months, robotics had orders and revenues of about $2.2 billion and $2.4 billion, respectively. They had operational EBITDA of about $300 million reported in the ABB structure. This will shift to discontinued operations. Secondly, there will be an impact of stranded costs reported in corporate and other until closing of the deal.

If we calculate this based on the last 12 months, it represents a negative impact on ABB operational EBITDA margin of about 40 basis points. However, the offset comes from moving robotics to discontinued operations, which will have a positive impact on group margin of similar magnitude. As you know, the Robotics business runs at the margin level below group average. To help out, this time you find the guidance framework based on both old and new reporting structure, and we will put restated numbers on the IR website in early December. With that, let's take a look at what happened in the different business areas, starting with electrification, where we continue to see a strong market environment as customers invest in electrical power. Orders were up 10% on a comparable basis, reaching $4.5 billion.

It's encouraging that the strong order growth was supported by a stable to positive development across all customer segments. Data centers stand out on the positive side and were up by double digits. Utilities is another strong market, although in this quarter, orders were broadly stable with last year's high comparable. Buildings is the largest segment for electrification, and here we see the positive order development driven by commercial buildings in the U.S. and Europe. China, however, remains weak. Looking at the residential piece, it was broadly stable in the U.S. and Europe, with continued weakness in China. Other positive areas are infrastructure related to land transport, as well as the Oil and Gas segment. Geographically, the U.S. continues to be the fastest growing market, increasing 23%. It was also good to see 15% growth in Europe, with good momentum across most of our large markets.

This more than offset the decline in the EMEA region, where China dropped 12%. Turning to revenues, which improved in virtually all divisions and amounted to $4.5 billion, up by 13% like for like. I want to highlight the book-to-bill of $1.01 billion, which was achieved on record-high revenues. A good delivery by the team and a proof point of a strong market environment. The strong revenue growth was primarily driven by higher volumes as we convert the backlog related to medium voltage and power protection, and by improved activity in the short-cycle business. We also benefited from a slightly positive price impact. Earnings again exceeded the $1 billion mark, reaching $1.1 billion, and was up by 17%. This was mainly driven by operational leverage on higher volumes, which more than offset the growth-related higher spend on R&D and SG&A.

Looking into the fourth quarter, we currently expect comparable revenues to grow at a mid-single-digit rate, and for the operational EBITDA margin, we anticipate it to sequentially soften, which is in line with the normal seasonal pattern. Now let's turn to motion, where the strong order intake was driven by good momentum in both the short cycle and project and systems businesses. In total, orders reached $2.2 billion, which is up 17% on a like-for-like basis. From a segment perspective, rail has been and continues to be a strong market for motion. Another good area is HVAC for commercial buildings and data centers. Oil and Gas, Power Generation, Water and Wastewater, as well as Food and Beverage, are all segments in the positive. The softer areas included the process-related segments of chemicals, pulp and paper, and metals. Shifting now to revenues, motion delivered just under $2.1 billion.

Higher volumes and pricing both supported the comparable increase of 3%. This year-on-year growth was slightly below our expectations, as the deliveries in the project and systems-related businesses were somewhat lower than anticipated. On the other hand, it was encouraging to see the good momentum in the short-cycle business. Total earnings improved by 4% from last year's high level, reaching $421 million. The margin, however, slipped by 60 basis points to 20.1%, in line with our guidance going into the quarter. For the fourth quarter, we anticipate comparable revenue growth in the low to mid-single-digit range, and the operational EBITDA margin to sequentially soften, which is in line again with the normal seasonal pattern. Also in process automation, the market profile remains similar to what we have seen recently. PA now has a positive book-to-bill for 20 consecutive quarters, and backlog sits at $9.4 billion. Quite impressive.

Orders amounted to $1.9 billion, up by 4% like for like. We saw good order momentum in the energy-related segments of Oil and Gas and Conventional Power Generation, and there was also an increased activity among nuclear customers. However, demand was lower for renewables. The market for Marine and Port Automation and Electrification remains strong, even if order intake remains stable in this quarter. On the softer side, we still have the process industry-related areas of chemical, pulp and paper, and mining. Revenues of $1.8 billion were seen a bit better than we expected, increasing 7% on a comparable basis. Execution of the high backlog was the key driver, with additional support from price mix development. The impact from higher revenues supported the earnings growth of 10%, and the higher spend mainly linked to R&D was offset. All in all, operational EBITDA margin improved by 30 basis points to 15.5%.

As from the fourth quarter, process automation will include the Machine Automation division. I would assume that most of you have not yet rebuilt your models to match our new reporting structure, so we will help with guidance both for old and new PA setup. For PA as is, we expect comparable revenues to improve in the mid-single-digit range, and the operational EBITDA margin to sequentially soften, which is again in line with the seasonal pattern. For PA including Machine Automation, we still foresee comparable growth in the mid-single-digit range, but given that Machine Automation is running at more or less a break-even level, we expect operational EBITDA margin in the new setup should be somewhere between 13% and 14%. As I mentioned, we will present restated numbers by early December.

Now, for the last time, let's turn to Robotics and Discrete Automation, as we going forward will report based on three business areas. Overall, the quarter developed largely as expected. There was a slight sequential order increase, reflecting a year-on-year improvement of 13%, up from last year's low comparable. Orders in the Robotics division remained broadly stable, as weakness in the Automotive and General industry segments was offset by a positive development in areas like Consumer Electronics and Logistics. Orders in the Machine Automation division increased sharply from a low comparable. However, the absolute order level is still low, as the market remains challenging. After seven consecutive quarters of revenue decline, it was nice to see both divisions returning to positive growth. Combined revenues improved by 5% and reached $807 million. This was driven by higher volumes, supported mainly by backlog execution, but also slight positive pricing.

Operational EBITDA margin of 9.2% was up 90 basis points year-on-year and 10 basis points sequentially. As in recent quarters, the robotics division's margin remained in the double-digit territory and actually improved slightly from last year. As mentioned earlier, the Machine Automation division is at the break-even level, as the volumes in production have not yet recovered enough to cover the cost of under-absorption. Now let's move on to cash flow, which, as Morten mentioned, was definitely one of the highlights in the quarter. All business areas reported an increase in free cash flow. This was driven by improved operational performance, as well as a larger release of trade networking capital compared with last year. We improved free cash flow by 32% to $1.6 billion, despite the higher cash tax expense and higher CapEx spend.

As you can see on the chart, we are at the year-to-date free cash flow of over $3 billion. In my view, we are well on our way to deliver on our ambition to improve our annual free cash flow from the $3.9 billion we generated last year. It is great to see that our focus on trade networking capital as a cash KPI for our businesses and ABB Wave Finance System Transformation are likely starting to have an impact on our cash performance. With that, let me hand it back to you, Morten.

Thanks, Timo. Now let's talk about the change in the way forward for our Robotics division. The reason for the change is that in parallel to us working towards the earlier announced spin-off, we received an inbound bid from SoftBank-based on an enterprise value of close to $5.4 billion.

Once such bids come in, it's our fiduciary duty to review. We have evaluated this carefully and concluded that it reflects the long-term strength of Robotics. Looking at the two different companies, it is our firm belief that the Robotics business will benefit from combining its leading technology and industry expertise with SoftBank Group's state-of-the-art capabilities in AI, Robotics, and next-generation computing. We think this will create a very strong platform for the future and expect the deal to close in the second half of 2026. Now let's finish with the guidance, which is based on the new reporting structure. Turning to comparable revenue growth, we expect it to be in the mid-single-digit range. Those of you who know us are well aware that the Q4 margin tends to be sequentially down.

This pattern should repeat, and we expect the margin in the fourth quarter to sequentially soften by about 150 basis points, in line with the historical average. We leave our 2025 revenue guidance unchanged but have updated the full-year margin guidance. We now expect operational EBITDA margin to be broadly at the higher end of our long-term target range of 16%-19%. As a final reminder, the pattern here is that in the fourth quarter, we normally have a negative book-to-bill. There is one more item to mention before we move to the Q&A. We announced an upcoming change of the CFO this morning. In his close to nine years with the company, Timo has played a key role in transformation to a more focused and better performing ABB. He has ensured that our finance function can best serve our businesses in a decentralized organization.

Soon, he will move to focus on his non-operational commitments, but not yet. Timo, you will be around for another quarter, be part of the Capital Market Day, and deliver the fourth quarter results in January. Timo will also be available to support a smooth transition to his successor, Christian Nilsson. Christian has been with ABB for nine years as CFO of the electrification business area, and I'm very pleased to see that we have a strong internal candidate to succeed Timo. Now, Ann-Sofie, let's open up for questions.

Yes, let's do so. Just as a quick reminder for those of you who have dialed in on the phone, press star fourteen to register to ask a question. Please remember to mute the webcast as your line is opened and limit it to one question, please. That way, we will allow for as many of you as possible to be heard in this Q&A session. You can also put questions through the online tool in the webcast, and I will voice them over from here. With that said, we'll open up the line for the first caller, and that's Martin from Citi. Martin, your line should be open.