ABB LTD Q1 2026 earnings call

Greetings, and welcome to this presentation of our Q1 results. As always, we have our CEO, Morten Wierod, and now for the first time, we meet our new CFO, Christian Nilsson. Christian, you may be new in this setting, but you've been with ABB for about nine years as CFO of Electrification. By no means a newbie to ABB in that matter. Great to have you here at the quarterly desk.

Great to be here.

I am Ann-Sofie Nordh. I'm Head of Investor Relations. Morten and Christian will talk you through the results presentation as per usual, and then we open up for Q&A. Without further ado, I hand over to you, Morten, to kick off the presentation.

Thanks, Ann-Sofie. It was good to see the quarter develop pretty much according to plan. This despite the escalated situation in the Middle East. Our priority has been to support our employees directly impacted by the conflict and do our best to keep our colleagues safe. When it comes to the business and our own operations, it has continued pretty much as normal. Overall, we have so far not seen a material change in general customer behavior. I would say that our Q1 order intake is evidence of that, as we, for the first time, reached orders of more than $11 billion. We improved across all P&L headlines, we had record cash flow for a Q1, and ROCE was at a standout 27%, and about 25% without the real estate gain. I'm pleased with the quarter. In February, we published the 2025 sustainability report.

This shows a steady progress towards our 2030 targets. One example is us reaching nearly 23% of women in senior leadership roles. We're closing in on our 25% target, and we have made strong progress from the 14% level five years ago. Looking at our Scope 1 and 2 emissions, we have now virtually reached our 80% reduction target. Another KPI is our waste to landfill, which we have reduced to 5.3% from 8.4% in 2019. Perhaps above all, it is very good to see that our employee engagement score keeps going up every year. For 2025, we reached a score of 80. This is up from 75 when we started the ABB Way journey back in 2020. We always strive to improve, and this is an important tool for us to capture focus areas to prioritize. The employees are our most important asset.

I am sure we will get to the topic of capital allocation at some point today. Outside of investing for organic growth, we distribute $2.1 billion in dividend. This corresponds to about 1.3% in dividend yield based on recent share price. In early February, we launched an annual buyback program of up to $2 billion. If fully utilized, this is about 1.2% of current market cap. I've already messaged that we want to allocate more capital to acquisitions. Cash flow should continue to be strong. With net debt to EBITDA of 0.3, we have plenty of headroom. Theoretically, we can make rather sizable deals. Like I've said before, base case is small to mid-size bolt-ons, and then we aim to add somewhat bigger deals on top.

Big to me would be along the lines of $4 billion we spent on Thomas & Betts and Baldor a few years ago. It would be great if we could get some deals up to that size. Key for us is the long-term value creation. I would rather make no deals than bad deals, and I have told the teams to do the right thing and step away if multiple becomes too demanding. The teams are active, and I'm feeling hopeful that we will deliver also when it comes to M&A. Another proof point of us spending money in the right places is the automation team's launch of its Automation Extended program. This is a strategic evolution of our DCS systems, where we have the world's largest installed base.

These systems are at the heart of industrial operations, but the customer's dilemma is that their control system must evolve to support digital and AI capabilities. They don't want to disrupt operations in a process plant running 24/7. Automation Extended is our way to help customers solve this problem. To do this, at the customer site, we create an ecosystem which includes two distinct yet securely interconnected environments, one being the core environment that controls critical processes. The other is the digital environment, which enables advanced applications, intelligence, and real-time analytics. The secret sauce is that we have connected these two environments with external clouds through a unified management and maintenance service systems. Combined, this enables the customer to modernize without touching or disrupting the critical part of operations. In my view, we are uniquely positioned to offer this type of solution. Now turning to Q1 orders.

The chart shows the record high bar of $11.3 billion. On a comparable basis, this is up as much as 24%, and it is very good that the strong development is broad across all three business areas. At 44%, I think it's fair to say that the orders surged in Electrification. On top of this strong comparable growth, our total order intake was also supported by a material FX effect of 7% and 6% on revenues, mainly due to the strengthening of the euro against the U.S. dollar. Let's focus on the business and dissect the market a bit. The short version is that we see persistently high demand across most of the main customer segments. On the positive side, data centers clearly stands out. Other segments to mention would be a strong utilities market with investment in grid build out, stability, and reliability.

Customers are also continuing to spend on upgrades of electrical infrastructure for land-based transport. Linked to transport, we still see good market conditions in the marine and rail markets. The same goes for commercial buildings with a related HVAC market. Looking at the developments through the quarter, the overall demand remained strong throughout. For us, the Middle East conflict has not changed the overall demand picture so far. If we zoom in on the Middle East region specifically, there is no pattern of a weak March for neither Electrification nor Motion. It was only in Automation where a weaker March was noted, and this only relates to the Middle East region, where Automation has an energy-linked customer base. For the group, the Middle East represents just below 5% of revenues, and Automation is about 1/3 of this exposure.

Looking instead at the Gulf states as an isolated group, this is about 3.5% of sales. Turning to revenue of $8.7 billion, the usual pattern of sequentially lower Q1 is visible. Year-on-year, the comparable growth of 11% is even a bit better than we expected. The beat is linked to the stronger deliveries in both Electrification and Automation. Despite the backdrop of high geopolitical tension, there was no change in customers' willingness to receive shipments. On the flip side, there was also no indication that demand was artificially boosted by customers stockpiling. Revenue increased in both the project and short cycle businesses, and higher volumes was the biggest contributor to the strong organic growth of 11%. The teams are focusing hard on price management. It is key to balance the trust and long-term relationships with customers, while at the same time defending our profitability.

The price components was close to 1% in the quarter. As a net total, we delivered another positive book-to-bill, now at 1.29. The backlog is at the record level of $27.5 billion, up 22%, and in my view, we performed well in a strong market. I mentioned that orders increased across the business areas. The same goes for the different geographies. All three regions were up by double digits, led by the Americas at 48%, like-for-like. Looking specifically at the U.S., orders increased by 67%. This high number includes some large bookings, but also base orders were very strong and improved by about 30%. Europe was up by 13%, with a stable to positive development in all our top five countries. EMEA improved by 10%, supported by the three largest countries in the region. Let's turn to earnings, and this chart also shows a record quarter.

We delivered operational EBITA of just over $2 billion, with a margin of 23.5%. This total was, of course, supported by the capital gain of $377 million from the real estate sale. When disregarding these gains in both this and prior year, the margin was up by 70 basis points. 50 of this was achieved through stronger business performance, and the remaining 20 was the net impact from FX and portfolio changes. I want to talk through the gross margin of 39.4%. This is a decline of as much as 290 basis points from last year. The bigger part of the drop, about 2/3, is due to unrealized FX and commodity hedges. But there were also operational impacts from portfolio changes in Motion with the Gamesa deal now impacting the full quarter. We have a bit of a price-cost gap.

I'm sure you remember that in our Q4 presentation, we talked about the time lag between price adjustment and realized P&L effect. We highlighted it specifically for Electrification, and we see it in the numbers for Q1. We also have a negative mix effect in both Motion and automation, a consequence of higher deliveries from the backlog-driven project business. In fairness, 39.4% gross margin is still a very decent level, but I never like to go backwards, even if it's mainly due to the unrealized FX and commodity hedges. On a positive note, we improved operational EBITDA margin through stringent SG&A cost management. These costs declined to 19.2% of revenues from 20.8% last year. All in all, operational EBITDA increased by 37%, 28% in local currencies, and margin was up by 320 basis points, out of which 50 is real business-driven increase.

Q1 was a challenging quarter with plenty of external volatility, and in my view, the team has done a very good job managing all of it, and I'm pleased with our results. With that, I hand it over to you, Christian.

Thanks, Morten. Let's now take a look at what happened in the different business areas, starting with Electrification. In Morten use the term surging orders. Seems a fair comment considering the comparable growth of 44%. Add to that 7% from FX, and we arrive at a new record order level of $6.6 billion. You see it in the chart to left on this slide. It is clear the Electrification market remains very strong. The good thing is that there's strength across the customer segments. In fact, all main segments increased at a double-digit rate. Looking at data centers, it was up triple digits. For this segment, we have an order CAGR of close to 35% in 2019 to 2025. The data center orders were very strong in both Q4 and in Q1. Pipeline looks good, and we expect this year to be another strong year.

Another segment I want to mention is utilities. Investment in the efficient, smart, and reliable grid are needed to make power available and accessible. We see this happening particularly in the U.S. The biggest segment in Electrification is buildings, at about 30% of revenues. 2/3 of that goes to commercial segment. This market continues to be strong. The residential market, on the other hand, remains generally muted. We, however, performed well in the quarter and actually had growth also in the residential segment. Now turning to revenues, we outperformed our own expectations. Short cycle business came through stronger. This resulted in comparable revenue growth of 15% and revenues of $4.6 billion. The chart shows the usual sequential pattern of Q1 being slightly lower than Q4, and then growing sequentially into the Q2. We expect this pattern to be repeated also this year.

Higher volumes drove majority of the comparable growth, and price added about 1%. The team is working on price management, but like we highlighted coming into the quarter, we had a price-cost gap. Pricing did not quite fully offset higher costs for commodities and tariffs. We expect that this will gradually improve as we progress through the year. On the back of operational leverage and higher volumes, as well as good SG&A cost control, Electrification increased operational EBITDA by 25% to $1.1 billion. This reflects an improvement of 17% in constant currency. Margins reached 24% and was up 80 basis points from last year. All in all, the team did a good job delivering record orders, record earnings, and a record Q1 margin and a strong cash flow. For the Q2 year-on-year, we expect comparable revenue growth in the mid-teens range, and operational EBITDA margin to improve.

Now let's turn to Motion, which also delivered a record order quarter. 9% comparable growth, plus 3% acquired growth, and another 6% from FX. This resulted in total orders of $2.5 billion. The segment pattern was very similar to recent quarters. We had positive momentum in areas like food and beverage and HVAC for commercial buildings. Similar to Electrification, customers continued to invest in grid stabilization to secure power availability. On the softer side, there are the process industries related segments like chemicals, cement, and mining. Orders in rail declined in the quarter, but I would say this is more due to timing, as we continue to see this as a strong area for us. Revenues of $2.1 billion had multiple drivers, led by comparable growth of 7%. Portfolio changes added 3%, and this is the Gamesa acquisition, which is now fully incorporated in the results for the full quarter.

There's also material effects of 6%. All in all, book-to-bill was positive at 1.19, and backlog increased to $6.6 billion. Based on Q1 revenues, Motion has a full three-quarters of revenue in the backlog. That's good top-line support for this and next year. Operational EBITDA was up by 11%, but the margin dropped by 110 basis points to 18.5%. There's several items to keep in mind. While the Gamesa deal comes with revenues of just over $60 million for the quarter, it made a small loss. This is according to expectations for the deal, but right now the dilution of margins is significant at 70 basis points, and this will be dilutive for 2026 as a whole. Our plans allows for a couple of years to bring profitability to double digit as we embed the offering in our broad leading market reach.

The second point to mention is High Power Division, where we had some operational inefficiencies. This diluted the margin by about 15 basis points. The team is on it, and we expect this to be resolved during the H2 of the year. Lastly, in the quarter, we had an adverse mix from higher share of revenues from the backlog-driven project business. For the Q2, we expect comparable revenue growth in the mid to high single-digit range, and we expect operational EBITDA margins to decline year-on-year on reasons we just mentioned for Q1. Now let's turn to Automation, where comparable orders increased by 5%. Morten mentioned earlier that this is where some market disruptions in the Middle East region was noted towards the end of the quarter. Energy plants have been targeted for attacks, and these are Automation customers.

So far, any change in demand patterns is contained to the Middle East region, which is less than 6% of Automation's revenues. From a segment perspective, both marine and ports continued their strong trend. Oil and gas was down on a challenging comparable. On a higher level, this market remains solid, but with added uncertainty I just mentioned. Customers in the nuclear segments continue to be active, and mining orders actually increased in the quarter, although in general, this market remains a bit on the muted side for us. Orders in the discrete market, meaning machine automation, were up strongly on a comparable, which is still at a fairly low level. We see the general market for machine builders still being fairly cautious. Continued soft environments are still noted for chemicals and pulp and paper. Revenues were stronger than expected also in automation.

On a comparable basis, we're up by 10%, with a full 8% in additional support from FX. In total, revenues amounted to $2.1 billion. These higher revenues came with an adverse mix compared to last year, meaning we had higher share stemming from backlog-driven project business. This hampered the gross margin, but the team more than offset this with stringent cost control in, for example, SG&A. As a net total, the operational EBITDA margin improved 50 basis points to 14.7%. Making the same reflection on revenue coverage as for Motion, the automation order backlog now sits at $10.4 billion. This covers nearly five quarters of revenue using this Q1 as a base. Looking into the Q2, we expect automation's comparable revenue to improve in the mid-single-digit range. Operational EBITDA should improve year-on-year. Now, let's move to cash, which was another highlight in the quarter.

The strong outcome was a result of improved operational cash flow in combination with a larger release on trade net working capital year-on-year. Despite higher paid tax and pressure from discontinued operations, we virtually doubled the free cash flow from last year to $1.3 billion. This includes a contribution of about $425 million from the real estate sale. This makes it a good and improved delivery from the business, so well done to the team. We had a strong start to the year, and we feel confident in our business performance, so we aim to slightly improve the full-year free cash flow from last year's $4.6 billion. This will be supported by higher cash flow in the business and a higher real estate impact. We have some anticipated offsets in the bridge.

First, in continuing operations, we assume some headwinds from growth-related buildup of net working capital. We have offsets in the discontinued operation linked to the robotics divestment. This includes $300 million of tax cash impact from closing the deal. That's leaving about $100 million for 2027. We also have $100 million more in CapEx for the building of the robotics hub in Sweden. All in all, we should be able to slightly improve free cash flow in 2026. With that, Morten, I hand it back to you.

Thanks, Christian. Now let's finish off with the outlook. We raise our ambitions for the year, both for top line and margin. It may seem bold to do it now when we don't really know the full impacts from the Middle East conflict, and admittedly, the risk for the global economic trading environment has escalated. We base our outlook on what we see and know now, and make a judgment call on that. If there are major changes or disruptions outside of this, we will adjust to that new reality. We have a backlog of $27.5 billion. Markets were overall strong in Q1, and so far, our customer interactions give us confidence for the year. For 2026, we still expect a positive book-to-bill, but we raise our guidance for revenues.

We now expect comparable revenue growth to be in the high single-digit to low double-digit range, and the operational EBITDA margin should improve year-on-year, even when excluding the real estate gain in the Q1 of 2026. This is up from previous guidance of slightly improve. For the Q2, we are up against a challenging comparable order intake, as last year we booked the $600 million order in automation. That said, we expect a positive book-to-bill. Comparable revenue growth should be in the high single-digit to low double-digit range, and the operational EBITDA margin should improve year-on-year. Now, Ann-Sofie, let's open up for questions.