Q3 2022 Abb Ltd Earnings Call
Okay.
Great. Thanks to you all and the night to connect again I welcome you to the presentation of Abb's third quarter results I'm also <unk> head of Investor Relations and next to me here ASI CEO beyond rosengren, and our CFO seemingly on Makena.
I will as usual take you through the presentation before went up for the Q&A session.
But before we begin I should mention the information regarding safe Harbor notices and our use of non-GAAP measures on slide two of the presentation.
Also this call will include forward looking statements, which are based on the company's current expectations and assumptions and are therefore subject to risks and uncertainties.
And with that said I will hand over to John and team out later on for their quarterly comments.
Thank you Ann Sofie and a warm welcome from me as well.
I have to say I'm very pleased with our performance this quarter.
Operation numbers show strength and verifies that ABB is moving in the right direction, even faster than we originally had anticipated.
You have probably already figured out that I'm very happy about the high margins of 16, 6%.
It looks like are we likely will reach our margin targets one year oddity, but I'm also pleased that we executed on our promises of that portfolio management.
In my view today's result is a good indication that we are improving operational performance through our new way of working accountability transparency and speed.
To me some proof points are our strong and broad price execution.
The record high margin.
We have made division led acquisitions, we divested non core operations and we completed the spin off of etc. On it in short, we are making ABB and more focused and well performing company with focus on being a technology leader in electrification and <unk>.
Nation that said, we still have a couple.
Of matters that need to be solved.
One such item is the legacy Christina project wins.
We now booked a provision related to this which impacted the best performance in the quarter.
We feel confident that there will not be any additional material provisions related to these matters I would come back to this a little bit later.
Before we move on I want to comment on E mobility, we.
We have said that we wanted to least part of this company and we remain committed to these but given the high volatility in the captive markets. We do not see it happening. This year, we followed the market developments closely and will come back when we feel circumstances.
Alright.
Now, let's look more closely at orders and revenues on slide four.
In our results FX, especially the continued strengthening of the dollar was a big negative swing factor of 9% to 10% when you compare our reported orders and revenues with their organic development.
But looking beyond that we had another strong growth quarter with comparable orders up 16%.
We saw a stable to positive development, the most customer segments east.
Easing of component constraints will shorten delivery lead times, which should trigger a normalizing of the order pattern. It.
Still it was another strong quarter for orders.
Actually the seventh consecutive period with a book to bill ratio above one.
And our order backlog remains.
On the record high level.
Looking at the revenue chart on this slide you see that this was one of the strongest quarters comparable growth was 18% with a positive development in all business areas. These reflect a strong price contribution.
But I was also pleased to finally see volumes released to a greater extent than in the previous quarters.
<unk> deliveries were held by better availability of electrical components and now the positive was does our China has that business faced less business said disruptions from Covid Lockdowns.
Now, let's take a quick look at the different regions.
Both Americas, and Europe improved by 20% or more.
They clearly outpaced the 4% growth in EMEA.
In Americas, the important U S market increased by 29% on a strong development across most segments in Europe orders increased in most of the major markets.
In the EMEA region, China declined by 2%.
Three of our businesses areas saw lower orders in China with only motion in positive territory.
Let's turn to slide six and our earnings outcome.
Gross margin is important and I was pleased to see an improvement of 90 basis points to 33, 5%.
The high volumes clearly helps but also very good price execution.
Of close to 7% for the group.
We increased operation EBITDA by 16%, but the underlying improvement was even stronger.
If we exclude the negative FX earnings were actually up by 27%.
I already mentioned this strong margin of 16, 6%.
We achieved this through and the impact from high volumes, good operational performance and well executed price management, we are clearly becoming more efficient.
I mentioned that could see the project to Eylea.
As a reminder, this is a legacy project dating back to 2015.
And we are now finally resolving the remaining matters of this topic. This triggered a non operation a provision of $325 million in the quarter. So on the back of these charge. Despite our strong operational performance EPS decline from loss.
Yeah.
We feel confident that there'll be no not anymore. Additionally materially provision related to these matters.
These are caselli case was reported ABB has spent considerable time and efforts, including launching a new code of conduct.
Educating employees and implementing control system to prevent something similar to happen again.
It is very important that our stakeholders feel confident in ABB and our business.
With that I hand over to Chandler. Thank you Ben and greetings to everyone also from my side first I want to connect the Bureau scores hillock comment. Once this is resolved I would say that besides the one noncore item of Max $100 million of risk, which we have mentioned to you already before we are now.
In normal course of business.
Fundamentally changing abb's risk profile. It has been a painful journey during past years now we are pretty much done.
We have a strong balance sheet, we have a net positive pension position and we have not been doing EPC business in a while and it is not coming back. So we are in a good position going into 2023.
Okay. Let's then look at the performance in the business areas, which actually all contributed to comparable growth as well as earnings and margin improvement.
Starting with electrification, where we continued to see strong customer activity, which resulted in comparable orders being up 20% looking at the total picture we saw strength in all customer segments and all regions improved at a double digit rate.
If you take a slightly more granular look we actually source off Duane softness in some segments in China, which declined by 4%.
In Europe , Germany stood out in the sense that orders declined Germany is a distribution led market and we saw distribute theres, bringing inventories to what seemed to be a more normalized going forward level.
I should also mention the very strong comparable order growth in the U S at 37%.
It was good to see that pricing was a strong topline driver also in this quarter, but importantly, we now all social volumes improving as a result of a generally strong market and easing of supply chain constraints.
These helped momentum in customer deliveries also in distribution solution solutions, which earlier has been hampered by semiconductor shortages.
In total comparable revenues grew by 22%, but still the order backlog increased to all time high level of 6.8 billion as book to Bill remained about one.
Electrification.
<unk> operational EBITA margin came in at a very strong 18% the highest level in recent history.
This was primary driven by a good development in volumes and continued strong price execution, which more than offset cost inflation.
The margin expansion of 210 basis points admittedly included approximately 50 basis points tailwind from eight two years old insurance claim.
Looking ahead into the fourth quarter, we expect double digit growth in comparable revenues and the seasonal pattern to repeat meaning a sequentially lower operational EBITA margin.
Let's then move on promotion on slide eight.
Motions orders again came in at around 2 billion. Despite the headwind from the stronger dollar.
In addition to a strong underlying market there.
24% comparable growth was also driven by large orders, including the approximately Huntington 70 million interaction orders.
A really good example on how we are supporting sustainable mobility in line with our purpose.
Our cutting edge technology include high efficient direction convert Theres in motors that will power more than 300, New trains Reforesting Europe's railway network.
Looking at the revenue chart in the middle of the Slide you see a clear acceleration in comparable book growth to 23%.
In addition to the continued solid pricing execution, we now so our volumes contributes to growth.
Helped by strong demand improved supply chain as well as a sequential recovery in customer deliveries in China as COVID-19 related business restructuring disruptions east.
The strong topline topline development was also reflected in motions operational EBITA margin of 17, 8% as higher volumes facilitate data and improved fixed cost absorption.
Price increases continued to offset the negative impact from higher input cost, but also a slight negative product mix, which was three GERD by high deliveries of electrical motors.
The margin in crude increased by 40 basis points from last year, which is a strong outcome also taking into account that this includes about 60 basis points dilution from the judge divestment.
Yes.
Looking ahead into the fourth quarter.
Most of it is facing a challenging revenue comparable from last year, Hence, we anticipate a sequentially lower growth rate to comparable revenues. We expect the operational EBITA margin to decline slightly in Q4, better you recognized from earlier years.
Turning then to slide nine and process automation for which the underlying market activity continues to be strong particular strength was no bidding end markets like gas mining and refining while there was some signs of headwinds in the more energy in Penn segment of the metal.
Industry.
Services was up 12%.
Because total comparable order growth of 3% was impacted by the timing of customers, placing orders, particularly in the energy industries and marine and ports divisions.
Regionally Europe and the Americas, both saw high single digit growth.
I may have declined as China orders were down 11% from a high comparable from last year.
The sequential decline in the order backlog that you can see on this slide was mainly driven by FX movements in constant currencies at the order backlog increased compared with the end of the second quarter as the book to Bill ratio remained above one rep.
Revenues grew 6% on a comparable basis with contribution from all five divisions.
We did see a sequential easing of component shortages, but are not totally out of the woods yet.
Looking at profitability you can see that the operational EBITA margin reached the highest level in recent history at 15.3% expanding 160 basis points from last year.
As a reminder, we have earlier mentioned to you that turbo has roughly 180 basis points above its positive impact on the margin.
Higher volumes and mix were key drivers.
But also some benefits from earlier data and efficiency measures. It is great to see that the team's conscious efforts to improve the gross margin in the order backlog is now being realized in revenues.
The margin trajectory is clearly moving in the right direction.
Looking at the expectations for the fourth quarter I'd note that <unk> had very high revenues in Q4 of last year, and consequently, we anticipate a low or even a slightly negative comparable revenue growth rate in Q4 this year.
We expect the operational EBITA margin to be similar to last year's reported level, even excluding the high margin accelerant business.
On slide 10, we turn to robotics and discrete automation, where overall customer activity remained at the high level that said the lower comparable order growth reflects customers returning to a more normal order pattern as they seemingly anticipate the easing of supply chain constraints to shorten delivery.
Lead times ahead.
In addition, there were some signs of customers, taking slightly longer to place orders, but we still see a robust opportunity pipeline.
Looking at comparable revenues it was good to see or a return to positive growth of 12% after having been held back by shortages of electric power electrical components and Covid related Lockdowns in China in recent quarters.
While it is deal no walk in the park.
We would expect these improved supply situation to sustain and support to support deliveries from the backlog in both divisions.
I'm also happy to say that the new robotics manufacturing site in Shanghai is now fully operational and volumes were transferred during the quarter.
Similar to the other business areas are as profitability benefited from higher volumes and a positive price impact as the operational EBITA margin increased by 170 basis points to 12.8%.
Underlined by both divisions in double digit territory.
For the fourth quarter, we expect an even stronger growth rate for comparable revenues than what we had in Q3 supporting some sequential margin improvement.
Moving to slide 11, showing the group operational EBITA bridge as you can see the comparable earnings improvement benefited from our strong pricing execution and the recovery in volumes, which more than offset the adverse effects from cost inflation acquisitions and divestments I E mainly.
<unk> as well as the impact from changing ethics, we're slightly diluting on a group level.
Let's now look at our cash flow on slide 12.
It was good to see our back end loaded cash flow expectations for the year coming through with the third quarter cash from operating activities in continuing operations at $793 million.
Compared with last year, the cash impact from better operational performance was however, more than offset by negative movements in trade working capital reasons, primarily being a higher buildup in inventories and less favorable change in trade receivables to support strong continued order intake and <unk>.
Higher revenue levels.
In this quarter, we had a negative cash impact of about $125 million from the exit of one non core legacy businesses as announced in Q2 looks.
Looking ahead I want to remind you about a couple of items, which will impact our future cash flows.
First John mentioned earlier, the quarterly provision of about $325 million.
<unk> is expected to impact our cash flow in the coming quarters as we finalized the settlement.
On a more positive note. We also receive about $1.4 billion in cash flow from investing activities from the sale of the remaining stake in Hitachi energy as we expect to close the transaction now in Q4.
Now you have heard us talk about being more active on the M&A side, So before I hand over to Pierre Let me briefly walk you through what we have done here, we are actually picking up the pace admittedly. They are small tickets, but this is natural seems smaller than.
To be easier to find and close.
The important thing is that our new processes work.
Through the implementation of the ABB way, we have significantly change how we work with M&A.
First we have increased the analytical discipline for acquisitions, then as a consequence of the decentralized ABB way operating model, we have transferred the responsibility to build the target pipeline to the divisions.
I E close to the market.
Each division is different and has different investment needs to secure future growth. We firmly believe that these new setup will result in more focused and accurate growth activities.
We simply think that doing many smaller deals is better for the buyer.
Beyond mentioned earlier division led acquisitions in this quarter motion announced their first two acquisitions in a long time, both the Siemens low voltage NEMA motor business and the power Tech convert their acquisition will help.
Respective divisions to further cement their leading market positions.
And then looking at the gray dots on the right side of this slide you can see that we have also driven minority investment through our debates divisional lenses.
Both the in charge energy and numerous it a majority of the acquisitions made earlier. This year are good examples that these minority investment against later also become acquisition targets.
So in summary, I feel we are on the right track to drive value creation also through inorganic growth and with that let me handover to be earned for some final comments.
T Mo.
And lastly on slide 14, we take a quick look at the expectations for Q4, we expect a low double digit comparable revenue growth impacted by the high level of revenues recorded last year.
The operational EBITA margin is typically lower in Q4, compared with Q3 and we expect this pattern to repeat also this year.
We have had a good performance so far this year.
And we are likely to achieve our margin targets already in 2022.
We believe that 2023 targets unchanged.
And what we mean is that any normal market fluctuations should not prevent us from achieving our operational EBITA margin of at least 15% and with that I.
I'll, let <unk> start the Q&A.
Let's open up for the Q&A and for those of you who have dialed in on the phone you press stop 14 to register to ask a question.
And just as a reminder to secure the sound quality. Please do remember to mute the webcast as your line is open for questions.
If you said wanted to put your question is true by using the online tool in the webcast. Please type your question in the field in the bottom right corner of the screen and I will then put you through the puts your question through it from here.
I already see that we have a long queue for questions.
And as we really want to try and get through as many of you as possible and I kindly ask you to this time limited to one question per person.
And with that said I think we start off with a question from the conference call as we open up the line for Martin at City are you there Martin.
Yes, I'm here. Thank you for taking the question.
One, perhaps I could ask about the energy.
Rice's impact you've talked about a little bit.
Remarks, but if we look at some of your end customers, obviously energy intense when you look at your cost inflation, you talked about strong pipeline, even though.
So perhaps not so much in the way the orders how are you seeing this impacting your customers.
We think that we can.
Creating an opportunity for you can support.
Energy efficiency, all goes over the coming months or is it more of a concern.
The impacts of perhaps all capacity being scaled back.
Let's see.
It's got to be like in Europe , and therefore more than negative.
Yeah.
With that thank you.
Yeah. Thanks, Martin for the question, maybe I'll I'll take a crack at that so so first of all I just want to say that the energy intensity for ABB itself is is quite low. So this is like you know half a point point of our cost base. So this really comes from the customer side as you mentioned and I think this is really a bit of a dwell situations. So yes, we have some customer.
As we mentioned today like in the metals industry is so if you think about something like aluminum smelters and that kind of stuff. So very in energy intense and when these these ones we are seeing a little bit of slowdown on the other hand, because our products are really driving energy efficiency on the market. We are seeing a lot of.
The growth I mean in some with new areas as well I just mentioned that in Middle East and Africa, we had like 50.
50% type of order growth driven by energy and.
We are seeing this also in some parts of the U S market and so forth. So I don't think for US. This is like a one answer I think overall I think we are pretty balanced on the situation, but we of course have to see how it plays out.
Are we good with that Mark and I realized you have more questions, but I kind of ask you to get back in the lineup and hopefully we will have time to come back to you for those.
We move on to Alex at Bank of America Merrill Lynch Alec pace your line should be open.
Thanks, very much good morning, everyone.
One question I wondered if you could talk a little bit about your pricing then.
I think you said, 7% at the group level I wondered if you could expand a little bit.
<unk> regional <unk>.
Differences or comments, perhaps around.
Where you find that that pricing is.
I guess coming up against any pushback or any indication of it.
Any deterioration deceleration in that regard. Thank you. Thank you Alex.
We could talk a little bit about the pricing as you probably know we we put in there.
Pricing strategy in each of our division already 2020 and pricing is not just lift the prices we work on value based pricing concept in and that we have implemented these strategies in all our divisions now of course, we are happy that we did it already then so when the inflation came at Teekay.
Good.
More or less all of our divisions was well prepared to handle that and I think that has been done and as you can see we have been able to offset many of the cost increases that we have had doing.
The last years.
Of course going forward, we see there are certain parts, where we see inflation, we see some there.
Increases in cost, even though it's getting a little bit better I must say.
Rates are going down some of the commodity prices are being more neutralized on the other hand energy prices are going up and the.
The inflation is still there as you've seen on some of the Napa. So so far I think the divisions, which is this is a division that have done that in a in.
In a quite dead professional way going forward I think that is actually dealt with all the division saw some of them will be more impacted some less and they need to deal with it. So I wouldn't say, that's a general picture for for all that.
At ABB, we can say, though that U S and Europe had bigger inflation than we've seen for instance in in Asia.
Okay very good thank you.
I'll put through a question here that we've received online.
And each from Jonathan Mounsey, Exane BNP Paribas. He says we are likely heading into a downturn next year I would think that the efforts to decentralized over recent years will yield a very different set of behaviors within the group compared to previous slowdowns in previous downturns group management moved to announce companywide restructuring.
Plants, if demand softens now hi will how will things be different this time and I guess this is I think maybe I should answer that question. Our course, we have a strong confidence in our new operating model. The ABB way, meaning we are moving the decision making to all our businesses as you know.
99% of all our people are today working in our businesses now we are not planning any kind of key.
Corporate activities when it comes to.
The size of the company.
Thank already our divisions have been seem to have you back and working with different scenario planning and looking at different kind of.
Softening of the market more heavily or just a little bit and they have made their plans based on that some divisions are more impacted and some will be less impacted than they will make these decisions in the businesses. This is an operating model that works and we feel comfortable about that going if we would go into soft.
The times going forward.
And we open up for our next question from the conference call, which should be coming from Gail Deutsche Bank.
Are you willing thanks very much good morning, everybody can you hear me we can do.
Okay. That's great. Thanks, very much I have equation on the order dynamics I mean.
If I try and adjust for seasonality. It appears that organic orders were up sequentially, maybe by nearly 5% so.
Really defies my expectations of some sort of normalization.
Hello, do you you know talking about normalization in discrete industries, but it appears that in all the segments, we've seen really.
The nice positive development, but my question is I mean in which segments and which regions. In particular did you see the greatest positive developments.
<unk> speaking thank you.
Yeah sick.
Sequentially.
I will start.
To start with this and thanks for the question we more look at this year on year, but I think if you look at our sequential development that we are first of all seeing very strong development in the U S. We had a very strong U S growth close to 30%.
And also in some markets in southern Europe , we have been a very very strong development in places like Italy, Spain, and so forth also U K whats. This time strong we have very strong growth in India actually already two years in a row over 40% growth. So these are some of the areas, but I'll also I mean this is of course order.
There's I understand not revenue, but we also we're expecting a little bit of this happened going into the year that we would really have a strong performance in Q3, when we sort of come out from some of the constraints. So these are some of the areas and then as I mentioned earlier, we are seeing some strong opex demand on oil and gas.
And we're also seeing strong demand in mining industrial automation or in industrial electrification continues very strong if you look at the trends in in motion in particular, we have now.
I think sequentially twice over 20% growth. So these are some of the areas where it's coming through.
Emotional trend I think is really really looking at very strong even if we had a bit more mixed now on electric motors, but that seems to be continuing on a good trajectory.
Thank you and thank you very much okay. Thanks, Gail we take the next question from the conference call and we all fly up the line for <unk> at Morgan Stanley .
Good morning, Heteropolar, well and thank you for taking the question.
Really it's for build and it's more color.
A local sense of what's going on in China.
If we think about the order development during the quarter, which which areas do you see is relatively strong.
I'm, assuming motion was goodbye this but if you can.
Can just give us a feel for how.
Which was the relative areas of strength or weakness and I guess similarly, how does the kind of base orders trend throughout the quarter the things.
Where things are accelerating in China. During thank you. Thank you.
Thank you Ben Yeah.
If you look at the China now you're seeing the orders in North America are you seeing in in Europe , and somewhat weaker in Asia, and China was down a couple of sand is of course, mainly driven by the residential construction market, which is as we all know the week is one we sell so much stronger on the.
The industrial part of the business says it varies a little bit between.
Our different businesses, who are I think the one sticking out most positively is motion actually we'd had a very strong position during the.
For the quarter.
And then if you look at on the robotics and discrete documentary Juno Robot, China is our biggest robot market.
It was down a little bit during the quarter, but at the same time, we should know that we have an order book, which is up 80% on that part. So we are normalizing a little bit on the on the order side that I mean going forward. We are we are not so nervous about China. We think it is moving on and where we <unk>.
Specced not to see any huge growth number but pretty steady going forward.
Yeah, maybe just comment on the base orders they were actually very similar now this quarter. So there is no big Delta on the base orders, we had higher in Germany, we had a bit of a delta because we have a lot had a large order, but this dynamic wasn't up there regarding China.
Okay. Thank you very much that's helpful. Thanks, Ben and then we open up for a question from Guillermo <unk> UBS.
Hi, Good morning, everyone. Thank you for taking my question I guess, maybe I wanted to elaborate.
The segments within electrification.
You gave very clear.
And regional picture, but I was wondering whether you describe a little bit the growth pattern that we've seen in industrial.
Stretching from Gretzky.
I think we will be testing and then similarly.
About cancellations do you think that they're based on increased cancellations coming from any other point in the backlog.
Thank you.
Yeah, Thanks, Guillermo maybe I'll I'll at least start this one so.
First of all on electrification, it's a broad based strong demand. So I would say this China topic, what burn was discussing is pretty much the only area, whereas where we are seeing a bit lower growth as you saw we had.
Over 20%, both order growth and revenue growth. So it's really nice to see now the conversion coming in and also actually.
<unk> much all the divisions are improving in performance. So the fact that the distribution solution is now both revenue and getting better margin is actually really good situation in the electrification now than if you go little bit deeper into the market in in Germany, We had 8% growth of base order growth was slightly.
Negative there we are seeing a bit of impact in electrification Q3, but we are actually expecting that channel to normalize going into Q4, and then really the other markets are looking quite strong and I think electrification in the U S was even more than the 30% if I remember correctly. So these outstanding with the dynamics on the <unk>.
Really really good performance in electrification and we're of course Super happy about that 18% margin there.
And we move on with a question for beyond Air from the online tool and it comes from Philip Bullock.
And he says John you're known for being a turnaround guy and it looks like ABB is now turned around is the work done here now or is there more heavily things that you can see and we still progress in the coming years.
Okay. That's an interesting question, but let me start with saying that before.
Before I even joined ABB.
I always had huge respect for this company I've said when I came indirectly this is <expletive>.
Great Company as very strong foundation, and we have good people I wasn't a bit puzzled about the financial performance why we couldnt and our delivery in line or better than our peers. So that is an important part I think we've taken a giant step on this side.
And I think we are now coming up to the right level center, but of course. This is only the start of a long.
Jeremy.
And I believe that ABB has much more potential than this add to go forward.
I'm, having my time of life, So I wouldn't.
I hope I don't have to leave the company at this stage I hope I can continue for a while more while we're having here a good time in the company's it's a great place to work for some big respect for ABB.
And we'll take another question from the online tool actually comes from two people, but on the sort of along the similar lines.
With our intentions on how to spend the proceeds from the sale of the final 20% of power grids.
How are you going to spend the cash voice well youre sitting on it.
Gotcha, Okay sure will will go for that no change in our capital allocation principles. So we will continue to look to execute in all of these wave of course boron first and foremost want to drive organic growth and then.
We are expecting to continue to be a sustained growing dividend per share value, adding acquisitions, we spoke about that a little bit more how we do that on the divisional lens and then finally, all show share buybacks and we should have capacity as we have discussed earlier to continue on all of these areas of course in the end. It is always a board and AGM.
<unk> decision regarding the share buybacks, but really really no change there we expect to end the year with a strong Q4 cash flow and of course, adding the power of its money with a strong balance sheet.
Very good and we'll take the next question from James Moore at Bank Bank, James Your lines will be open.
Good morning, everyone hope, you're well could I come back to pricing. Please.
On revenue price impact I guess from your peers that you might've been around 2% and PAA and already last quarter, maybe about fix or mid single digit.
Vacation emotion last quarter and I wondered what are the numbers, how about sort of developed in the third quarter and how you expect that to develop into the fourth and into next year and to what degree average order prices are higher or lower than revenue prices.
Yeah, Yeah. So division now starting up delivered division business area based at price levels. So of course, we are not disclosing the slightly so I can just refer maybe to the to the seven so I would say that our shorter cycle businesses were a little higher and then as you say be a and and are a little.
Lower when.
When we look at the dynamics what is really really good to see that we are actually now covering with pricing all the costs in the gross margin and a little bit more so our cost increase from commodities has started to come down also the freight actually didn't have a big impact now we have a salary inflation on the factor.
Our east that's understandable, but the pricing was well covering that then we had a had a nice drop through if I remember on the.
<unk> level of 23% on the additional revenue so in that sense that equation is working quite well and.
Then how will be stick of course is depending on the demand normalization, which we have been seeing but I would say that in the shorter cycle business.
<unk> sees that it sticks sort of fairly well in this kind of situation unless we something totally drastic happens.
I can say we also we also look at the.
Gross margin in our order book, which is of course, an important measurement exactly for the future and we can of course see that good strengthening in this and we believe that the gross margin is.
Most important for any business is to be able to develop and that is the value of your actually your pricing into your customers. So if you're looking at order book it looks quite promising.
And if I may if if if labor costs labor inflation goes up which it looks like it's going to is that harder to pass them with pricing and requires productivity what can we pause for them.
We look at the total cost picture there is a lot of factors. So you know it's from sub suppliers its energy cost it is.
Freight everything else that need to be priced in of course, and we have professional pricing department now in in all our divisions and we do expect that they deal with all.
All of these kind of inflation.
If its material or if it's.
The cost increases from labor.
Thank you very much thanks, James and we move to will Mackie had kept the sure.
Hello. Good morning. Thank you for the time the question relates to <unk>.
Apply change in balance sheet.
Primarily.
The $1 7 billion of inventory increase in working capital year to date, and the nearly $700 million of trade receivables.
Perhaps you could talk to how you expect the working capital to normalize over the next 12 to 18 months and specifically in the fourth quarter and how that may relate to how you see the evolution of the supply chain.
Yeah, Yeah. Thanks for the question I was kind of expecting that that would come at some point so when.
When we look at the inventory first of all of course, the most important thing is that the inventory is line with the growth we are seeing in the backlog and when we look at that measure I E inventory relation with inventory to the backlog. It has actually stayed pretty similar during the last two or three.
Year, so around 30% type of level when we look at it on on constant currency and if you then look at our order backlog, we are actually expecting more conversion shorter term. So as we are sitting here and spending and looking at our numbers.
We expect about 50% conversion now from current backlog 23 last year, we were expecting 45 conversion. So it's actually kind of like coming closer and in that sense. We think that this is well in line and and we would expect the conversion to start to happen now already in Q4.
When the demand picture in our expectation will start to normalize now, let's see how that plays out and then we expect a strong cash year for 2023, given this continuing and I can't see any reason why abb's long term net working capital to revenue would have.
Move to a higher level from where we have been historically, so I would expect that number to come down now Q4 again provided we don't have some.
Let's call it surprise additional order boost and then to continue to then further normalized 23 three.
Thank you and we have.
One question from Andy here with J P. Morgan he says.
Can you comment on the attractiveness on the pipeline on smaller acquisitions is that rules out larger deals or are all large deals no. We're all deal sizes on the table.
Hi, Thank you maybe I can talk a little bit about the acquisition side.
Think we're being clear that we look at each of the division and we say stability and profitability before growth about 70% of our divisions are now in what we call growth mode.
And when we talk about growth is organic and acquisitions.
And we'll see more and more deals there.
In place at the moment and we expect this of course to accelerate five to 10 per year is what we think is a reasonable level.
Of course, driven fully from the divisional side and they doing it of course to strengthen their comp.
Competitive situation in into the market. So it can be technology or market share in in certain areas.
<unk> of these deals are quite small at this week, which is natural when it said driven by the divisions, but we could of course also see I think at this stage as ABB now he's coming into stable and profitability phase, maybe somewhat be geared, but I'm not saying that we're going to go into any corporate driven by.
Business area drove any if there is a for instance.
<unk> division size that could be added onto the beast as if it's strengthened the business area. Overall, so I think we have a pretty good control over these and I think it's a good process at the moment.
So we will experience many small to medium size and maybe some little bit bigger.
And then we'll take another question from the online tool, we say as does our full year 'twenty two margin outlook for at least 15% exclude accelerant for full year.
Yes, I can answer that one it's very important when we say that if we will reach our target for this year about 50% then we exclude et cetera on for the whole year. So that that is important and you know that XL roundhouse proximately point too.
<unk> points impact on the group.
And then we'll take another question from the conference call as we open up the line for Joe at Cowen.
Are you with us.
I am good morning.
They still are.
I still struggle with what I see.
In like larger term macro indicators with what companies are saying with short cycle demand and when I look at orders and you look at things like ISS and contraction mode, yet companies seem to be talking very positively about short cycle. When you look at your own.
Results here.
How do you square that are you do you feel that ABB is significantly outperforming what your competitors are doing and just feel like some sort of inevitable.
One has to meet the other or do you expect that.
You can just continue to grow.
All the while broader indicators suggest that the markets are going the other way.
Let me talk a little bit about growth and we've talked not too much about the expectation going forward, but but yeah. We have I mean a net.
Seven quarters with book to Bill ratio, which is about one so we've seen good growth in the last quarter on a very high.
Levels of course, now and also when revenues start coming out in the right way, we should see a normalization I think of their order pattern going forward, it's little bit too early to say, yet, but we look at different kind of scenario and we have to play with that I think ABB is keeping us well up and all.
In there in relation to competitors.
<unk>.
I don't think we are outperforming probably anyone I think we have a <unk>.
Good way to execute and operate in a well position when we look at the global trend. So we are where you should be for why we should see growth in the coming years and that is one of the reason also why we lifted.
The growth targets over our business cycles 242, 7% because we believe that we are in in good market than short term of course, there will be ups and down in the market has always been in and we need to deal with them in the divisions need to deal with them in a professional way and we do it we do believe that the operating model we have today.
We'll do that.
So so far I mean, it's we haven't seen year on year in Q3 any changes in the in the in their order.
Behavior and the buying pattern, but of course, we read the news we see what's taking place in the world.
We of course expect as everybody else that going forward, we aren't sure there's going to be some difference, but we have seen during the last six to 12 months.
And unless I remember only I'm a little bit we can tag on to the question of how has Q4, starting with because I don't think anyone has asked it yet so I'll make sure to put the question.
Now we continue to see the see growth, even though we expect a more normalized order pattern.
During the quarter.
Right. Thank you.
And a question from Simon at Jefferies says it.
Can you comment a bit on the end markets in discrete industries, where you're seeing customers taking longer to place orders.
Yes.
Yes, I mentioned that a little bit before and that's very much related to drop at the robotics <unk> discrete automation business, you're also a problem.
You know that this is these are the two divisions, where we have had the biggest challenges when it comes to supply chain Shan semiconductors broad. So we have during your time built up a huge order book so that needs to be executed. So we have thousands of robots and we have a lot of it again is that need to be executed jewelry.
Next quarter, but also into next year next year.
I mean, I can just mention that our order book here had from one year being 80% up you know you can imagine this is of course not normal market trends. So there is of course, a lot of orders lying there which was also placed because of our.
Limited possibilities to deliver so of course that need to be delivered out and and then we of course have to build on their market trends when it comes to automation in the market, which we believe are positive.
And we have actually won I think final question here coming through on electrification and the comments about normalization on distributor.
Our inventory levels.
How much of a risk if any is this dynamic for demand in the next quarters given that we say that it seems to be completed by the end of Q3 I don't know to say that this comment was specific to Germany, and then maybe hand over to Bert.
Yeah.
This is of course, we've seen that that effect in Germany, especially in electrification, where most of the business is handled through our.
Our partners and with the.
The discussions with them there is certain normalization of their inventory levels.
Looking to our electrification business. This is more or less completed now and we do expect more normal order pattern within that the industry going forward.
This is very specific for Germany, Ras in the market as you've seen on the electrification.
Besides China, we have seen of course, very very strong growth not least in North America.
Yes, and then we actually have one quick last question from the conference call comes from Daniele like Goldman Sachs Danielle Ali Your line should be open.
Thank you very much good morning. So we're following up on the commentary regarding margins and growth going forward I guess looking from here to 2005, you just said over 15% remains the target, but you seem to lean the commentary in the call a bit more towards growth is it fair to say when we think about earnings growth going forward.
Are there any places where there is significant margin improvement potential left or the opportunity is more the growth side.
Thank you Danielle I think it's a it's a good question as I mentioned here is that we have.
Our approach is to cemented its stability profitability before growth and you are seeing more and more division moving in where they have the what we call the growth mandate that doesn't mean that they're not driving their margins because they continued to improve this and that is part of it but of course, they will also drive.
<unk> growth.
More stronger and today about 70% of our divisions are having what we call the growth mandate, but we still have a number of divisions that are not meeting their expectations for <unk>.
In Asia performance and they are.
Focusing of course to getting the levels to the right level before they really pushed these kind of.
Mrs.
Of course, we are happy to be on on the one year early with reaching the target but for US. This is just an in between target. We believe that ABB has a great potential.
We will continue to drive that and for US it's important to stay above 50%.
Despite the different.
The demands in the market if it gets tougher or not so we need to make sure that the business has continued to develop and.
So if it would be a tougher time next year, we do expect that they also should deliver on that.
But we have no roof. So they will hopefully continue to improve.
Thank you very much. Thank you. Thank you Daniela and with that we'll close this session. We thank you very much for joining us today and we'll see you in about the call at this time.
Thank you goodbye.
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