Q3 2021 Abb Ltd Earnings Call

[music].

<unk> and our CFO T movie and muscular.

They will take you through the presentation after which we'll open up for the normal Q&A session.

But before we begin I would like to draw your attention to the information regarding safe Harbor notices and our use of non-GAAP measures on slide two of the ABB presentation.

The conference call will include forward looking statements 20, and these statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties and with that said, we will kick off today's session and we will do that with a short video related to the process automation.

<unk> recent launch of the inline portfolio with technologies, facilitating the all electric mine, including monitoring and optimizing energy usage.

Yeah.

[music].

Okay.

Yeah.

[music].

Okay.

Yeah.

[music].

And with that I will hand over to be on and T. Mo to take you through the results.

And a warm welcome from me as well.

I got the picture.

The video and the mining sounds close to my heart and the ability that ABB has to support the mining industry to become more sustainable.

We are really looking forward to the development of these new products now.

Now, let's take a look at.

It was somewhat mixed bag, let me start with the positives.

First the strong order growth.

It spanned across all business areas with growth in the range of 17% to 40%.

Secondly, the margin of 15, 1%, yes, we had some.

Q what from unusually low corporate costs, but you know that's fine with me.

That said I do not expect these low corporate costs to stick in going into Q4. So we have some work to do before we hit an underlying run rate of the margin target of 50.

On a per cent.

I have promised you to get there.

2023.

We will reach it.

I also want to mention the cash flow of $1 1 billion, which is in my view was excellent.

Last but not least we had some.

15, 15 product launches on top of the mining portfolio in the video we launched the worlds fastest EV charger.

It is capable to fully charge, an electric car in 15 minutes or less.

This could be a game changer.

But there are also challenges in the quarter.

We would not deliver as much as we wanted to because of the tight supply chain.

Its stretch beyond components shortages is also logistics and the tide labor market, where high production levels meet continued call with constraints.

This impacted.

More than we thought it would and these challenge will not go away quickly.

Let's turn to page four.

And then look to the different segments.

I already mentioned that orders were strong they increased by 26%.

Although from a low level last year.

It's fair to assume that there is certain contribution from customer putting through orders to manage availability.

It's difficult to give an exact number but we believe it's a less of an impact than we saw during the first half of the.

The improvement was supported by a positively develop many more or less all customer segments.

And we saw increased demand in short cycle as well as process industry related businesses.

Orders in our service business increased by 18%.

While service revenues increased only 2%. These means that we should see and positive mix going into next year.

In the revenue charge you can clearly see that the revenues were impacted by the challenges to get stuff out the door due to the strength in the value chain.

We saw an increased impact on our ability to deliver compared to Q2.

Comparable growth was limited to 4% year over year, meaning we are building order backlog.

Now, let's take a quick look at the different regions on slide number five.

Gross.

Strong in all three regions in America, the important U S market increased by 31% in Europe, more or less all the top 10 markets improved by strong double digit growth rates and EMEA includes a 9% order growth in China, where we saw solid.

Solid demand in the quarter.

On slide six you'll see the charge with their operational EBITA and the margin of 15, 1% overall, we have kept the stringent cost control SG&A was 17, 5%.

Growth revenues down from 18.1 last year.

As the World starts to open up for business travels we need to make sure that we have a smart approach use the virtual learnings from the last year, while still making sure we maintain our relationship with our customers.

I'm very pleased about the jump in the gross margin process automation showed stellar improvements while electrification and motion were impacted by the higher raw material costs as we have said they would be.

I already earlier mentioned, the unusually low corporate costs, where we had some positive.

<unk> coming through in the quarter.

But I do not expect this to continue into the next quarter.

In summary.

Considering the challenges from the tight supply chain and pleased about overall delivery in the quarter.

And with that I hand over to Tim Martin.

If the market a little bit more about the numbers. Thank you Burton.

And greetings to everyone from my side as well and as usual, we'll start with electrification, where we saw continued strong demand driving order growth to 17%.

The strength was spread across geographies and was particularly strong.

To throw Americas.

It was also good to see the mid single digit growth in China.

From end market perspective, we saw a positive development in all segments.

I, particularly mentioned the high activity in transport and infrastructure with solid development in both residential and northern.

Incidental buildings.

And we also saw an improving pipeline with the oil and gas segment.

I would say that in these strong orders it is fair to assume some positive impact from customers preordering in the wake of a generally tight supply chain.

We are actively work.

Worked with quality assurance in the orders, we accept even stopping away from even stepping away from some where lead times to delivery is too long.

The strained valued chain hampered revenues for electrification in the quarter.

The constraints extended beyond just semiconductors, we also.

So saw impact from a tight labor market, particularly in the U S and logistics issues.

There were also some customer acceptance delays as they wait for complete deliveries.

These challenges triggered a sequential decline in revenues, even though we reached an improvement of.

4% year on year.

If we add this up the order backlog further increased to $5 $2 billion, which is a record high level.

I'm sure you remember that we said during the spring and summer that electrification will be coming off a favorable.

Raw material hedges, we now see it coming through in the numbers. We are close to offsetting this with price increases, but then of course, we have a situation with cost increases. Additionally, inflated by the tight supply chain all in Google All included the margin declined sequentially.

When Chile, while it improved from last year supported by volumes and stringent cost control, excluding last year's positive impact of about 100 basis points or non repeating items the underlying operational EBITA margin actually improved by approximately 60 basis points to.

15, 9%.

Looking ahead into the fourth quarter, we expect continued challenges in our ability to deliver.

Also comparable are getting tougher we.

We expect a low or no comparable revenue growth year on year and the normal pattern of sequential.

Klein two operational EBITA margin.

Let's move onto motion and you will recognize similar topics at four E L.

As you can see in the left side of the chart.

Order intake remained at the very high level.

<unk> growth was strong across all divisions and segments and we saw double digit growth rates in all three regions.

In total orders increased 22% compared with last year.

I should mention here that also emotion continued to focus on maintaining a good quality.

And good order backlog, meaning and without putting numbers on that.

That orders could have been even higher should we have captured all that would've been available to us.

Comparable revenues improved by 2% adversely impacted by the semiconductors at the cheese and in balance sheet.

<unk> in the value chain.

Like in electrification the headwinds from raw material prices and cost inflation in general have increased it is therefore encouraging to see motion achieving a stable operational EBITA margin at the high level of 17, 4% support.

David by a favorable mix.

Price increases and a small volume impact.

For the fourth quarter, we anticipate around mid single digit growth for comparable revenues and the normal sequential pattern of softening margins due to the mix in deliveries.

We now turn to slide nine and Brosious automation.

Where we added further to the order of backlog with comparable orders and revenues, expanding 40 and 5% respectively.

With order growth benefiting from a low base last year.

I'm.

Sure you remember that we have guided for a pickup in business activities in the process related industries. During the second half of this year and we see that happening now we saw good progress in all divisions and a positive development in all segments.

I want to mention that we booked a large order of about.

$120 million in the energy Division in Australia.

We will supply the overall electrical power system for our subsea natural gas compression. The order is a great example of our technology leadership with our solutions operating under extreme conditions at <unk> thousand.

100 meters below sea level.

I was pleased to see the operational EBITA margin coming in at a strong 13, 7% the highest margin in three years.

Excluding the adverse impact from the charge related to the Kuwait project last year profit.

Visibility improved approximately 330 basis points.

The result benefited from the positive volume development improved business mix.

Efficiency measures and strong project execution.

In Q4, we expect comparable revenue growth to pick up in.

And Fourteens range, and Q4 tends to be the strongest margin quarter for PPA. So I hope, we see somewhat of a sequential pickup also this time.

On slide 10, we turn to robotics, and discrete automation, which had another quarter with good.

In the intake up 26% on a comparable basis.

The strength was broad based led by strong growth in general out of industry consumer segments and service robotics as well as machine automation.

However, imagine automation division has seen.

Significant the impact from the semiconductor shortages and higher input costs.

This has meant increase lead times to customers, while managing the needed price increases.

We are working in tight cooperation with our machine automation customers to manage this difficult situation.

Order array revenues declined by 3% impacted by both machine automation and robotics.

The robotics impact is a combination of a positive momentum in the non automotive robotics segments, which however was offset by a lower deliveries from the outdoor sue stems business.

The lower delivery.

Are a consequence of our earlier strategic decision to deselect systems business orders with low ABB content to improve quality of revenue and drive profitability long term.

This improved mix with robotics is already partly visible in the operational EBITA margin of our.

Liberty, which increased by 160 basis points compared to last year, despite the lack of comparable growth.

The improvement also benefited from a higher share of service business and earlier implementing efficiency measures, which overall more than offset the adverse development in machine automation.

Looking into Q4, we expect <unk> deliveries, particularly in machine automation to still be adversely impacted by component shortages, hence we anticipate comparable revenue growth to be broadly in line with Q3, and we expect the operational EBITA margin to sequentially.

Chile decline as it normally does between Q3 and Q4.

Moving on to slide 11, showing the group revenues and operational EBITA Bridge.

As you see the year on year improvement benefited from the absence of last year's charge related.

To the core solar project.

A reduction of losses incurred in noncore businesses as well as our organic development.

The latter was supported by higher volumes mix and earlier implemented cost actions, while commodity prices increases after hedging slightly outpace.

Base price increases for the quarter.

Now on slide 12, really turn to my favorite slide on this deck or the favorite topic.

In Q3, we continued this year's strong cash performance with cash flow from operating activities of $1.1 billion.

Do you have an improvement of about a $720 million from last year, a great achievement.

Driven by higher earnings as well as significantly lower transformation and pension impacts compared to last year.

As you can see in the chart, our cash generation for the first nine months.

Already exceeds the full year cash generation in both 2019 and 2020 by approximately $400 million.

And I am confident that we can continue this positive momentum and make this a really good cash flow year also regarding free cash flow.

Then before I handover to burn let me just briefly come back to some of the near term challenges mentioned today.

We do not expect that needs to go away tomorrow, hence we need to focus on how we best manage the situation of a continued tight supply chain.

We will put the emphasis.

On orders scrutiny to make sure we can deliver and secure quality into order backlog.

We will build inventory where appropriate and we will continue to work on redesigns and validate new suppliers.

Raw material prices should be a near term headwind.

And.

Emphasis eligible for our product businesses.

Our teams have done well so far in mitigating through active price management, and we will continue to be active on pricing.

The strained value chain drives cost inflation in various areas.

I use here, our fright and packaging expenses.

Indicative example.

We also see labor cost inflation in some regions and also <unk>.

Labor accessibility can be a challenge.

We are in a good position in the sense of having production footprint close to sales, but even so when component soft cares we may have to.

That's in between sites, which we wont normally would not do.

We have taken all these impacts into account to our best ability in the numbers discussed today.

I also want to say that I think our business management teams are handling this tough situation really well with needed speed and accountability.

And the fact that we have virtually no order cancellations indicates that the whole market is very very tight and on that note I would like to hand back to bill.

Thank you T Mo.

Okay, let's finish off with some thoughts on how we see the ending of the year.

We expect the.

Market to remain robust in the fourth quarter.

As you see in the summary of the segments, we expect market improvements in most areas compared with last year.

This said we have.

Talked a lot about the supply chain situation today, we saw an impact.

Acted as in the third quarter and we do not think this would be a quick fix so we anticipate comparable revenues growth in the Q4 to be broadly similar to what we saw in Q3.

We expect the operational EBITA margin to decline sequentially.

Really from the 15.1% reported today as it normally does.

Like I mentioned I do not expect the low corporate costs to repeat.

And in Q4 anyway tends to be a quarter with the seasonally weaker margin.

This means.

That we slightly adjusted our full year guidance.

Two comparable revenues to be between six and 8%.

Slightly down from the previous indication of just below 10%.

We leave the margin guidance for the full year impact.

Yes.

Said earlier, we are not yet a run rate of 15%, but we are clearly making good progress we have some more work to do internally we.

We need to make sure all divisions now take the responsibility that they have been handed with full ownership of their businesses.

I'm very confident that we will deliver and then move beyond.

And with that I'll, let <unk> take over and guide us into the Q&A. Please.

Great. Thanks, Dan.

And with that we will have time for the Q&A and you said you wanted to ask a question. Please I understand.

I think star 14, and to secure the sound quality displace remember to mute. The webcast that says your line is open for to put your question through.

And just in case, you haven't noticed it I wanted to mention that you can now also put through your questions using the online tool in the webcast and before.

My preface to plan you should see a box at the bottom of the right hand corner, where you can type your question and I will put it away from here.

And I can see that we already have questions coming through in and I, just would like to repeat myself from previous quarters I kindly ask you to limit yourself to two questions.

And we will do our best to get through as many of you as possible.

Hello Praful.

Good morning, everyone I hope Manuel and thank you.

Vacates in my questions two please.

Just trying to think of clever ways to ask this question about electrification margins and I guess I guess, what we're trying to understand is where in the band.

Is the is the new normal.

You've made it very clear that there are hedges rolling off and other effects I think we all knew there'd be electrification margin wouldn't be coming down sequentially, but maybe it's a little bit below than what we thought. So I guess my question is if we just step back and think about price cost volume into next year can we buy the argument.

<unk> EBIT in principle electrification margin should be going up in principal in 2022 versus 2021 should ask them. That's the first question and then and the second one I'll just get it out of the way is just around China I saw some of the press commentary was was quite positive if unless.

Arguments.

Numbers wrong, if we look at revenues and orders.

<unk> <unk> and <unk>. They did obviously sequentially come down and when I look at the sales Miss in China to me minus 4% is the main contributor. So can you just explain.

The supply chain situation different.

I'll, let Gina award won't really is going on sequentially in China. Thank you from all the questions.

Sure.

We have songs.

No.

No problem.

Okay.

Mhm.

Okay.

One of them.

Hum.

Okay.

Sure.

Right.

Great.

Right.

Hum.

Mhm.

Thank you.

Non-GAAP.

To support the program.

Okay.

Okay.

Okay.

Yeah.

It varies a bit.

They're on site feedback.

Then somebody should be muted I think maybe in the in the conference operator actually.

Yeah, Yeah, yeah yeah.

Yes, I absolutely Dave Thank you Yep Yep.

Yeah Yeah.

Okay.

Thank you very much indeed for that deal and I'm. Just so you know I'm being told by my team that.

They can hear me on the webcast, but not management. So I just I just want to be clear that there may still be some issues with the Audi just just so you're aware I'm I'm gonna logo for a call.

Back in but saying thank you for answering the questions.

Thank you bye bye.