Abb Ltd

SIX:ABBN

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, good morning. Welcome to the Q2 results 2018 media conference call. I'm [indiscernible], the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Mr. Christoph Sieder, Head of Corporate Communications. Please go ahead, sir.

[Christoph Sieder, Head of Group Corporate Communications]

Ladies and gentlemen, a very good morning, and welcome to our media call on the occasion of our Q2 results. Our CEO, Ulrich Spiesshofer, and our CFO, Timo Ihamuotila, are here with us. Our CEO will give us a briefing on the Q2 results. And after this, we are all ready to take your questions. Without any further ado, Uli, over to you.

[Ulrich Spiesshofer, President & CEO]

Thank you, very much, Chris. Good morning, ladies and gentlemen. Thank you for attending this media call for our second quarter financial results.Let me start by summarizing some of the key figures from the quarter. We drove order growth in all divisions and across all regions. Total orders were up 8% in the second quarter, base orders increased 9%. Revenues were up 1%, our book-to-bill ratio was 1.07x versus 0.99x a year ago, and higher in -- than one in all of our divisions.Our operational EBITDA margin increased 60 basis points to 13%, the highest level since the first quarter 2015. Operational earnings per share increased by 27% to a record $0.38 per share. And this is, again, highest since the first quarter 2014. Net income was $681 million, up 30% from the prior year. Cash flow from operating activities was about $1 billion, up from $467 million in the prior year period. The difference reflects a change in the timing of employee incentive payments, which were paid in the second quarter in 2017. We expect solid cash flow delivery for the full year.We completed in the second quarter the acquisition of GE Industrial Solutions within the committed time frame, and have started the integration at full speed together with all of our new colleagues. With our disciplined focus on relentless execution, our 4 divisions are continuing their drive towards world-class productivity and effectiveness.Before I go into detail, let me put our results in context. Our performance in the second quarter shows that our transformation over the past years is delivering. Base orders has been growing now for 6 consecutive quarters, so we can safely back -- say we are back in growth territory. Our operational improvement has outperformed topline growth, a clear indication that we have fundamentally reduced the cost base of the company and that our productivity programs are delivering. With active portfolio management in our ongoing shift of ABB's center of gravity, we have shaped 4 market-leading entrepreneurial divisions and made ABB a leader in digital with ABB Ability.In the second quarter, ABB Ability was a significant contributor to our overall positive growth momentum. Today, we are present in the market with 2 clear value propositions: we bring electricity from any power plant to any plat; and we automate the industries, from natural resources to finished products. Over the past few years, we have continuously streamlined and shaped our portfolio towards better competitiveness, simplicity, lower risk and higher growth. This was a very active period of transformation, but we would not say that our portfolio is now carved in stone. This will continue to shape ABB and constantly look for opportunities to shift our center of gravity to drive more profitable growth and further streamline and strengthen ABB. The guiding principle of our actions will always be what creates, long-term, the most value for all of our stakeholders.Our confidence in our strategy and people has paid off. Now we are ready to make ABB even better by continuing to shape a pioneering technology leader for the era of industrial digitalization and artificial intelligence.Now let's look at our divisional performance. Orders in third-party base orders were higher in all 4 divisions. In Power Grids, the power grid third-party base order momentum continued rising 7%, total orders were also up by 5%. Revenues were lower, dampened by the lower opening backlog -- order backlog that we went into the quarter with. The operational margin was at 9.10%, mainly due to the lower revenues.In Electrification Products, we grew total and third-party base orders by 6% and 4%, respectively. Order growth was broad-based with all business units performing well across all regions. Revenues increased 4% and the operational EBITDA margin expanded 100 basis points year-on-year, benefiting from pricing actions and sustained productivity efforts.Industrial Automation. Total orders, including B&R and currency effects were up 34%, while base orders increased by 30% from the prior year period. On a comparable basis, total orders rose 15% and base orders 9%. Industrial Automation revenue were stable and the operational EBITDA margin grew by 70 basis points.Robotics and Motion improved orders across all business units and regions in the quarter. This demand from the process industry is continuing the recovery trend. The base orders increased 16% and total -- or total orders were up 11%. Revenues increased 8% and the operational EBITDA margin grew by 100 basis points year-on-year to 16.1%. Let's take a closer look at how our markets are developing. The strongest growth came from Europe where total orders increased 10% and base orders grew 12%. The best-performing markets were Italy and the U.K., together with positive contributions from Germany, Norway, Spain and France. These contributions more than offset the declines that we saw in Sweden, Finland and Switzerland. The Americas delivered a 7% rise in total orders and base orders, as we recorded higher growth in the United States, Canada and Mexico. In the United States, our largest market, total orders grew 6% and base orders grew 7%. In Asia, Middle East-Africa, total orders grew 7% with good order demand from China, India and the UAE. Base orders rose 7% with positive contributions from China, India and Australia. In China, our second largest market, total and base orders increased 20% and 23%, respectively.In our key customer segments, demand from utilities remained mixed, customers continued to invest in renewables integration and improving grid reliability, but large -- larger grid investments were subdued. A highlight was $150 million order from Danish energy company, Ørsted, for the Hornsea Two wind farm in the North Sea. In industry, we saw broad-based demand in the quarter. Process industries, including oil and gas and mining continued to increase the investment. This CapEx concentrated at the moment, mainly on upgrading and automating brownfield assets.Our focus on industries such as food and beverage and automotive in the more discrete space proved beneficial for order momentum, particularly for ABB's automation and robotics solutions. Finally, demand in transport infrastructure was solid, with good orders received for rail electrification from the construction sector and from speciality vessels. Strong growth in data centers and electric vehicle charging solutions continued. Now let me update you on our Next Level strategy execution across our 3 focus areas of profitable growth, relentless execution and business-led collaboration. In the second quarter, we took decisive steps to drive profitable growth in both the short- and long-term. We launched game-changing innovations, including the world's fastest electric vehicle charger, which is already bringing orders in Europe and the U.S. as well as our single-arm YuMi robot.The integration of our ABB Ability digital solutions into our wider portfolio is continuing rapidly. In the second quarter, we launched an entirely new robot controller family, OmniCore, incorporating ABB Ability and Connected Services, as well as the first digitally integrated ABB Ability power transformer in enabling remote monitoring and preemptive maintenance of this crucial part of any power grid in the world. As an example, ABB is working today with China's Yitai Group, a manufacturer of industrial machinery for the textile industry, on ABB Ability solutions that will ensure the highest possible productivity in their new plants. This is the first order in a series of long-term collaboration and digital projects for this group.During the second quarter, we announced an investment of $100 million in an R&D facility and training campus in Eggelsberg, Austria, the home of B&R, which will drive innovation in machine and factory automation, including artificial intelligence and machine learning. We also announced an investment of around $30 million in a new state-of-the-art manufacturing unit for power grids transformers offering in Sweden.In line with our active portfolio management, we completed the acquisition of GE Industrial Solutions on June 30. This strengthens our #2 position in electrification globally and expands our access to the less attractive North American market, already ABB's biggest market, and our exposure to early cycle business. Approximately, $200 million of annual cost savings are expected in year 5. We have realized the value through product and technology portfolio harmonization, particularly also from coupling ABB Ability solutions offerings with the extensive installed base of GE Industrial Solutions.Synergies will also be expected from footprint optimization, supply chain savings and SG&A cost reduction. We aim to bring the margin of electrification product division after an initial dampening effect back into its operational EBITDA margin target range of 15% to 19% during the year 2020 as originally committed. The transaction includes a long-term supply agreement with GE, along with the right to use the GE brand. On the execution side, ABB continues to benefit from its ongoing cost management and productivity programs. The group focus on quality is building on the 1,000-day programs that we completed in 2017. Performance improvement opportunities are now being addressed using Lean Six Sigma across all of our businesses and led by the businesses themselves.ABB currently has about 1,500 of these projects underway, led from each -- within each of our divisions. Moving to business-led collaboration, we concluded an important agreement in the quarter to develop industrial-grade edge data center solutions with HPE and Rittal. In India, we signed a collaboration statement and agreement of intent to support the government's Make In India [ an ambition ] with advanced manufacturing technology. In our collaboration with Kawasaki Heavy Industries, announced last year, this has resulted with the world's first common operating interface for collaborative robots.We continue to build on our brand positioning through our title sponsorship of the ABB FIA Formula E Championship Racing Series. The season which ended in New York last weekend was a tremendous success in terms of customer engagement and brand positioning. Talking about the brand strength, our brand equity has increased in value by $2.5 billion since the start of 2017. We are recognized as a digital leader, having now been ranked #2 in a survey of industry peers that was conducted recently. For the second year running, we are Switzerland's most attractive employer among engineering students, ahead of Google, for the second consecutive year.In short, our branding and our ABB Formula E Championship is driving brand awareness worldwide, demonstrating our technology leadership in e-mobility in a very far-reaching way.Let me summarize. Our second quarter results showed that our transformation over the past years is delivering. We are growing in all divisions and across all regions, and our operational EBITDA result and margin, and our operational earnings per share are at record levels. Today, our ABB is more focused, simpler and leaner than ever before in its history. We have 4 market-leading entrepreneurial divisions that are ideally positioned in their respective markets to take advantage of the growth opportunities and our leading offering in digital with ABB Ability.We have 2 clear value propositions: We bring the electricity from any power plant to any plat; and we automate industries, from natural resources to finished products. Going forward, we do continue to shape ABB and make it even better by attracting portfolio opportunities and by investing in ABB Ability, in research and development, in integrating our acquisition, and in our people and brand.Thank you very much for your attention. Now let's turn over to your questions.

[Christoph Sieder, Head of Group Corporate Communications]

Thank you. Can we please have your questions now?

[Operator]

[Operator Instructions] Your first question from the phone comes from Johannes Ritter from [indiscernible]

[Unknown Analyst]

Do you know the movie Groundhog Day?

[Ulrich Spiesshofer, President & CEO]

Yes, I know that movie.

[Unknown Analyst]

Okay. Then you probably know already what I'm referring to. Although ABB decided not to split up the company, but discussions about this keep on coming back and keep on coming back. What's your comment on this?

[Timo J. Ihamuotila, Executive VP & CFO]

Well, look, when you take our portfolio and look where we are at the moment, the past couple of years, we were really very active in the period of our transformation, and we did a lot of [indiscernible] connected portfolio management. We divested some activities. We added some activities in a very significant way. And it's clear that we would not say that our portfolio is now cast in stone. We will continue to shape ABB and we will constantly look for opportunities to shift our center of gravity to drive more growth and further streamline and strengthen ABB. That means we will continue to live our guiding principles, where we try to or rather aim at creating most value long-term for all of our shareholders, and that's the guiding principle, it has been that way, it will be that way. If you take the Power Grids division itself, it was rumored to be about $4 billion to $5 billion worth a couple of years ago. We have created substantial value, and we will continue to do so through organic and inorganic activities in the portfolio.

[Unknown Analyst]

Is it true that activist investors are still putting up pressure?

[Timo J. Ihamuotila, Executive VP & CFO]

Well, I'll let you comment on that. I told you what ABB's position is.

[Unknown Analyst]

Now if we take -- no, I have another question, sorry. Did you see the statement of Ulrich Lehner from Thyssenkrupp, he said, he described the actions of some of the activist shareholders as psycho terror, can you understand that?

[Ulrich Spiesshofer, President & CEO]

Look, I will not comment on anybody's comments here.

[Christoph Sieder, Head of Group Corporate Communications]

Thank you, Johannes. Next question, please.

[Operator]

The next question from the phone comes from [ Charlie Feyanbach, EWP ].

[Unknown Analyst]

I hope you can you hear me.

[Ulrich Spiesshofer, President & CEO]

Yes, very well.

[Unknown Analyst]

Can you hear me?

[Ulrich Spiesshofer, President & CEO]

Yes. Please go ahead, we can hear you.

[Unknown Analyst]

Just some questions. Growth of sales was 1% in the second quarter. Again, quite slow, you mentioned in April that you expect to have better sales growth in the second half of the year, can you confirm that? And Canada trade dispute, can you give us a bit remark in your expectations of the developments there? I mean, if it's escalating, it could start in the consumer confidence and the global growth at all. Some economists are even prognosing a possible recession in 2019. How do you see that?

[Ulrich Spiesshofer, President & CEO]

Thank you very much for your question. Yes, look, it's really interesting how the revenue pattern is developing. If you take them all, early cycle activities in Robotics and Motion and Electrification products, we already had really solid revenue growth in these more early cycle businesses this quarter. We had in electrification products, 4% revenue growth, we had in Robotics and Motion even 8% revenue growth. Industrial Automation was steady. When you look now at the backlog that we are building in the businesses, then all of the businesses, the backlog is about -- the book-to-bill is about 1x. So that we are building the backlog for future revenue growth, and we confirm that it's the ambition in the second half of the year to have more revenue growth than in the first half of the year. That was the first point. The second point, on trade. Now look, as you have seen in our outlook statement in the last couple of weeks, there were a lot of uncertainties around trade, around political uncertainties. It's our responsibility as leaders to navigate our teams, and our customers, our businesses through that with a steady hand. On the trade side, basically, it can impact ABB from 2 angles: On the one hand, on the products that we ship, on the ready-made products, could be impacted by the trade; and on the other hand, given that we really aim to have leading-edge products, we source differentiating material from all around the globe, in different places, and the imports of this raw materials could also be impacted by trade freight regulations that are coming up. It is clear at the moment, we need to make sure that we keep a calm head in these raising uncertainties. We're working with our customers to really navigate through this time, that every day, there is some additional news on that one. And I really hope that in the near-term future, the world calms down, and these uncertainties go away, that we can really benefit from the underlying good and solid growth momentum of our markets.

[Christoph Sieder, Head of Group Corporate Communications]

Thank you. Next question, please.

[Operator]

The next question comes from [ Ilrich Meyer ] from [ Endoc sec ].

[Unknown Analyst]

I have a question concerning Slide 5. Cash flow from operating activities. I didn't get that fully. I think that the change here has to do with the way you paid out bonuses, I think, in the second quarter, not in the first one. And so my question is, what exactly was the reason? What exactly did happen? And why did you actually move the payout of the bonuses? That's my first question. And the second question is -- another question on the trade war. Mr. Spiesshofer travels a lot, and I think he has lot of connections also to the Chinese. Can you give us any -- maybe a view on how the Chinese are taking this? Are they actually still relatively calm? Or are they starting to get annoyed?

[Ulrich Spiesshofer, President & CEO]

Yes, thank you very much for your 2 questions. On the cash flow, last year we decided to postpone the payment of the variable payment in the context of the Korea situation. That means the cash went out last year in the second quarter, and therefore, we had a lower cash flow last year. This year, we paid the variable payment, again, in the normal ABB paid in the first quarter, and that's the reason of the change. So it's basically a timing difference of variable payments. On the Chinese side, now look, as you know, I have been this year already, I've been, 4, 5 times in China, and I will be, again, couple of times until the end of the year. China has clearly the ambition to be -- and then recently, President Xi said it in one of the meetings, a good citizen in the global city, and we see at the moment a lot of nervousness all around the world. Locally in China, for China, we have a calm situation, the markets are growing. And as you see, from our really stunning order intake, that is growing 20% and 23% for total orders and base orders, respectively. The economy and the markets for us is really good there. And I really hope that the relationship between the 3 big parts of the growth, the Americas, China and Europe, is coming to a calmer situation that we can navigate the growth with a little bit more certainty than we see at the moment.

[Operator]

The next question from the phone comes from John [ Rader ] from Reuters.

[Unknown Analyst]

Gentlemen, can you hear me?

[Christoph Sieder, Head of Group Corporate Communications]

Yes.

[Ulrich Spiesshofer, President & CEO]

Yes, we can.

[Unknown Analyst]

Okay. Just a bit of a clarification, if you would. You say about the portfolio currently it's not set in stone. Can you give a little bit more detail what this actually means? I mean, does this mean that ABB could go back into making big acquisitions again after the GE deal's been sealed and you've had B&R now for over a year? Or are those completely like big sales as well, like I mean, could you actually get it? It's a big possibility in [indiscernible] does it mean, [indiscernible] power grid is back -- could be up for sale? That's the first question. And the second one is, although orders are going up, sales are a bit sluggish. And you've been quite upbeat on sales moving forward. I was wondering how long do you think before your sales kind of catches up then, from the orders kind of seeding through to the revenue line?

[Ulrich Spiesshofer, President & CEO]

John, thank you very much for your 2 questions. If you look at ABB and you take 3 steps back, look back the last 10, 20 years, the company has continuously taken active steps on portfolio management. You might remember when I came in as the CEO, the first thing that they did is a portfolio pruning exercise of about $2 billion of activities that left ABB they didn't fit to the core, then we strategically invested into B&R and GEIS. We divested our cable business, and that will be a pattern that you will see also going forward. It's my responsibility to continuously shape this portfolio. And every quarter, every year, we have considerations how to develop that further. And as ABB evolves over the time, you will see us adding smaller and bigger pieces, and also divesting smaller and bigger pieces. This is something normal that shouldn't be surprising if you know ABB very well. If I take a wider perspective, we divested the power generation business quite a while ago. We built up over the last 10 years, a completely different bench strength in automation. If you add up what we did in Baldor and in Bernecker + Rainer, B&R, we are today through active portfolio management, very strong Industrial Automation, in fact, #2 globally. That's a position that was established through some very large-scale moves. And we divested certain activities, like the cable business, which was also a substantial part. So yes, the pattern will continue, and we navigate through the portfolio management with a steady hand and a clear ambition to add long-term value for our shareholders.

[Unknown Analyst]

Does that include -- could this -- does that mean that Power Grids then, could be up for sale, again?

[Ulrich Spiesshofer, President & CEO]

No. Honestly, we manage the entire portfolio and all businesses are part of the portfolio.

[Unknown Analyst]

Okay. And on the sales business, when do you see that could the orders be [ reflected on ] the sales line?

[Ulrich Spiesshofer, President & CEO]

Let me get back to that one. You have seen, as I commented before, John. On the early cycle activities, we already have growth that is even in Robotics and Motion, ahead of our bandwidth. In Electrification, we are fully in there, due for 4% revenue growth. The more late cycle businesses that regards also, hit by a lower opening backlog, Industrial Automation it is steady, and yet will now, over the next quarters develop a stronger revenue momentum. In Power Grids, we had 2 elements, you had on the one hand, the soft market and the lower opening backlog from that. But we also went through a massive transformation of the business model that is basically took out 2 billion of top line, both on reducing the EPC activities, putting them and then divesting cable altogether, that naturally ends up due to lower backlog for the year. We are also working out of that one. So in the next quarters, you will see a continuous momentum on the revenue side going in the right direction. And then medium term, we will head into our territory that we have committed.

[Christoph Sieder, Head of Group Corporate Communications]

Next question, please?

[Operator]

The next question comes from [ Michaele Orloff ] of ASP.

[Unknown Analyst]

I wanted to come back to the trade wars. Can you explain to us in more detail how it affects ABB specifically, I mean what lines of business are affected, and in what way? And what you can do to mitigate the impact of tariffs, if they get implemented? And at the moment, what -- I mean, are you still instinctively doing [indiscernible] or are you already starting to take action to try and cope with potential [indiscernible] extra taxes?

[Ulrich Spiesshofer, President & CEO]

Yes, thank you very much for your question. Look, I would like to describe the inbound stream and the outbound stream of activities in ABB. On the inbound stream, we buy materials all around the globe. If you look at the raw materials, speciality steel and electric steel is a key differentiating element of our motors and our transformer offering. In motors and transformers, ABB has the highest level energy efficiency of any competitor with our product. And one driver of this energy efficiency is the smart use of very, very sophisticated electric and steel grades that we use there. These steel grades are only produced by a couple of suppliers around the world, in Japan and Korea. And we need to make sure we have access to that. And it's very clear, if these steels would be hit with a tariff, import tariff to our operating activities for example in U.S., this would have a tightening effect. On the outbound side, we ship around the world. We have a global supply chain. In general, we have gone a long way to -- build a natural hedging position that we basically build in the markets where we sell, but we still have some traffic of products going around the world, and that might be impacted. Now, the mitigating situation. Look, since a couple of quarters, we have a specific task force that works on the impact on the tariff, made up of our government relations people, our supply chain people, really on their toes, helping us to navigate and understand first what we are really facing. And then we have a whole scenario set of mitigating actions, ranging from natural hedging to switching from raw material to ready-made product import that we have. So ABB is prepared to navigate these waters, but it's very clear the current uncertainties keep us busy.

[Christoph Sieder, Head of Group Corporate Communications]

Good. Next question, please?

[Operator]

Gentlemen, there are no more questions at this time.

[Ulrich Spiesshofer, President & CEO]

With this, I would like to close this media call on the occasion of our second quarter results. Thank you very much for having joined us. And we wish you a very good in what's remaining summer days. Thank you, and here is [indiscernible] again.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.