Abb Ltd

SIX:ABBN

Earnings Call Transcript 2021-Q3

[Ann-Sofie Nordh]

Greetings to you all, and welcome to the presentation of our Q3 results. I'm Ann-Sofie Nordh, I'm Head of Investor Relations. Next to me, I have our CEO, Björn Rosengren; and our CFO, Timo Ihamuotila. They will take you through the presentation, after which we 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 the non-GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward-looking statements. 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's recent launch of the eMine portfolio, with technologies facilitating the all-electric mine, including monitoring and optimizing energy usage.[Presentation]

[Ann-Sofie Nordh]

And with that, I will hand over to Björn and Timo to take you through the results.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Ann-Sofie, and a warm welcome from me as well. Today, I got to pick the video, and the eMining stands close to my heart and the ability that ABB has to support the mining industry to become more sustainable. We're really looking forward to development of this new product.Now let's take a look at Q3. It was somewhat a 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 support 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 15%. But I have promised you to get there in 2023, and 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 exciting product launches. On top of the eMine portfolio in the video, we launched the world's 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 were also challenges in the quarter. We would not deliver as much as we wanted to because of the tight supply chain. It stretched beyond component shortages. It's also logistics and the tight labor market, where high production levels meet continued COVID constraints. This impacted us more than we thought it would, and this challenge will not go away quickly.Let's turn to Page 4 and look to the different segments. I already mentioned that the 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 less of an impact than we saw during the first half of the year. The improvement was supported by a positive development in 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%. This means that we should see a positive mix going into next year. In the revenue chart, you can clearly see that the revenues were impacted by the challenges to get stuff out of the door due to the strain in the value chain. We saw an increased impact on 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 #5. Growth was strong in all 3 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 AMEA includes a 9% order growth in China, where we saw solid demand in the quarter. On Slide 6, you see the chart with the Operational EBITA and the margin of 15.1%. Overall, we have kept the stringent cost control. SG&A was 17.5% of 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 improvement, 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 cost, where we had some positive 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, I'm pleased about overall delivery in the quarter.And with that, I hand over to Timo to talk a little bit more about the numbers.

[Timo J. Ihamuotila, Chief Financial Officer]

Thank you, Björn, 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 in 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 high activity in transport and infrastructure, with solid development in both residential and nonresidential buildings. And we also saw an improving pipeline with the oil & 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 general tight supply chain. We have actively worked with quality assurance in the orders we accept, even stopping away from -- even stepping away from some where lead time to delivery is too long. The strained value chain hampered revenues for Electrification in the quarter. The constraints extended beyond just semiconductors. We also saw impacts 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 included, the margin declined sequentially, while it improved from last year, supported by volumes and stringent cost control, excluding last year's positive impact of about 100 basis points of nonrepeating 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, comparables are getting tougher. We expect a low or no-comparable revenue growth year-on-year and the normal pattern of sequential decline to operational EBITA margin.Let's move on to Motion, and you will recognize similar topics as for EL. As you can see in the left side of the chart, order intake remained at a very high level and growth was strong across all divisions and segments, and we saw double-digit growth rates in all 3 regions. In total, orders increased 22% compared with last year. I should mention here that, also, Motion continued to focus on maintaining a good quality in the order backlog, meaning, and without putting numbers on that, that orders could have been even higher should we have captured all that would have been available to us. Comparable revenues improved by 2%, adversely impacted by the semiconductor shortages and imbalances in the value chain.Like in Electrification, the headwinds from high 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%, supported 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 9 and Process Automation, where we added further to the order 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 industry division in Australia. We will supply the overall electrical power system for a subsea natural gas compression.The order is a great example of our technology leadership, with our solutions operating under extreme conditions at 1,400 meters below sea level. I was pleased to see the operational EBITA margin coming in at strong 13.7%, the highest margin in 3 years. Excluding the adverse impact from the charge related to the Kusile project last year, profitability 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 the mid-teens range, and Q4 tends to be the strongest margin quarter for PA. So I hope we see somewhat of a sequential pickup also this time.On Slide 10, we turn to Robotics & Discrete Automation, which had another quarter with good order intake, up 26% on a comparable basis. The strength was broad-based, led by strong growth in general industry, consumer segments and service robotics as well as machine automation. However, Machine Automation division has seen a significant impact from the semiconductor shortages and higher input costs. This has meant increased 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.RA revenues declined by 3%, impacted by both Machine Automation and Robotics. The Robotics impact is a combination of a positive momentum in the nonautomotive robotic segment which, however, was offset by lower deliveries from the auto systems business. The lower deliveries 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 RA, 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 implemented efficiency measures which, overall, more than offset the adverse development in Machine Automation.Looking into Q4, we expect 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 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 Kusile 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 outpaced price increases for the quarter.Now on Slide 12, we return 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, an improvement of about $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 9 months already exceeds the full year cash generation in both 2019 and 2020 by approximately $400 million. And I'm 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 hand over to Björn, let me just briefly come back to some of the near-term challenges mentioned today. We do not expect this 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 emphasis on order scrutiny to make sure we can deliver and secure quality in the 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 tangible 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 freight and packaging expenses as an indicative example. We also see labor cost inflation in some regions and also 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 components are scarce, we may have to ship between sites which we 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 indicate that the whole market is very, very tight.And on that note, I would like to hand back to Björn.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Timo. 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 segment, 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 it impacted us in the third quarter, and we do not think this will be a quick fix. So we anticipate comparable revenue growth in the Q4 to be broadly similar to what we saw in Q3. We expect the operational EBITA margin to decline sequentially from the 15.1% reported today, as it normally does. Like I mentioned, I do not expect the low corporate cost to repeat. And Q4 anyway tends to be a quarter with a seasonally weaker margin. This means that we slightly adjust our full year guidance to comparable revenues to be between 6% and 8%, slightly down from the previous indication of just below 10%. We leave the margin guidance for the full year intact. Like I 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 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 Ann-Sofie take over and guide us into the Q&A, please.

[Ann-Sofie Nordh]

Great. Thanks, Björn. And with that, we will open for the Q&A. [Operator Instructions] And just in case you haven't noticed it, I want to mention that you can now also put through your question using the online tool in the webcast. [Operator Instructions]I can see that we already have questions coming through. [Operator Instructions] And with that, we will open up for questions. And we will start with a question from the conference call. So operator, if you would please put through the first question, please, which should be from Ben at Morgan Stanley. Ben are you with us?

[Benedict Ernest Uglow]

Two, please. I was trying to think of clever ways to ask this question about Electrification margins. And I guess what we're trying to understand is where in the band is the new normal? You've made it very clear that there were hedges rolling off and other effects. I think we all knew that the Electrification margin would be coming down sequentially, but maybe it's a little bit below than what we thought. So here's my questions. If we just step back and think about price, cost, volume into next year, do we buy the argument that, in principle, Electrification margin should be going up, in principle, in 2022 versus 2021? So that's the first question.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 quite positive, unless we've gotten our numbers wrong. If we look at revenues and orders between 2Q and 3Q, they did obviously sequentially come down. And when I look at the sales mix at ABB, China to me at minus 4% is the main contributor. So can you just explain, is the supply chain situation different in China? And what really is going on sequentially in China?

[Ann-Sofie Nordh]

Thanks, Ben.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Ben. I'll take this question on and then starting with the margins for Electrification. Yes, the 15.9% might look a little bit shy compared to expectation. On the other hand, I think it's pretty clear that the underlying margin improvement is 0.6% compared to last year, saying that we had onetime items that was actually moving backwards, putting into the result about 100 basis points last year. I think it's clear that Electrification has had a tremendous development during the years. And I'm really happy with the way they execute their performance. And I'm very positive that they will continue to improve their margin both next year and into 2023, where we had set the margin target for them. So I feel very comfortable about that.But on the other hand, we should know that volumes were lower. It was tough from that point of view. And of course, volume is an important part to drive margin in this business. But I think they've done an excellent job when it comes to pricing. They are very skilled how they do. And second quarter, they pushed -- or the first half year, they pushed a lot of price increases into the market which we benefited. Now as we've said also before, in Q3, some of those hedges have gone out there. So some of those cost increases from supplies are going through, where we, during the first half, had positive actually price performance, while you have slightly negative in this part. So this means that they will continue to push this kind of cost increases into the market. And I think they do that very comfortable. And to...

[Ann-Sofie Nordh]

Björn, if I may interrupt, I think if I'm rightly informed, we have a problem with the audio. And...

[Benedict Ernest Uglow]

There is a bit of -- there's a feedback. Somebody should be muted, I think, maybe in the conference operator, actually.

[Ann-Sofie Nordh]

Okay. Can I just ask you, Ben, did you hear Björn's reply to your questions?

[Benedict Ernest Uglow]

Yes, I absolutely did.

[Ann-Sofie Nordh]

It was good enough. Thank you.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. So we are very optimistic the good development in Electrification will continue. And I think in each of the division, we see good progress. So I'm very confident about the continuous development towards the target. On China. China is, I mean, a tough market during the year, and it's a very important market for Electrification. And some of our huge production facilities there is in the southern part of China, where there has been interruptions due to COVID outbreaks where they've gone in, tested all personnel. Some suppliers have been -- not been able to operate because they've had some COVID cases. It's quite strict in China at the moment. So they've been struggling hard to get products out for that.What's important to see is that the China growth continues for the group. It's up 9%, which I think is quite steady. And to be mentioned there also that last year, we -- China was the only market that grew with 8%, when the rest of the world were going backwards. So we continue to see this strong demand from China. And we see -- we gave you a little bit of an indication also that the beginning of the Q4, which we yesterday received the growth numbers there, and it continues on a good way also in China.

[Benedict Ernest Uglow]

Okay. Björn, 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 want to be clear that there may still be some issues with the audio, just so you're aware. I'm going to log off and call back in.

[Ann-Sofie Nordh]

Okay. Thank you. We will check.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Okay. Thank you for that. Thank you so much. We'll check this, of course.

[Ann-Sofie Nordh]

We will check the audio and see if we can actually carry on. And we're being told that it's about to be fixed. So we will carry on with another question, and we will take that from the online option. And we have a couple of questions coming through from James Moore at Redburn. And he wants to know if we could please give some color on the good order growth in PA and RA and also between the [ units ] there. We'll start with that one, and we'll follow up with the second question after.

[Björn Klas Otto Rosengren, Chief Executive Officer]

I think that's an excellent question. I'm, of course, very, very positive when it comes to Process Automation. Not only that we see good orders, there were some big orders that Timo talked about, but there is also good underlying growth in orders. I think service, which is a very important part of this business, actually grew with 18% during the quarter. So that is actually driving good revenues going forward. So I think in all, if you look at all Process Automation divisions, we see double-digit performance, above double-digit performance, which I think is great. And we saw good demand in all of the divisions, so driving this strong growth. So that's positive. Last year, they were the one that also were hampered hardest during the COVID, not least because service is difficult to execute.When we come to the Robotics and Machine Automation, which is actually 2 divisions, and it looks a little bit different between them. I think from the Robotics perspective, we see good orders, as I said 25% approximately, which is a good number. We also see somewhat higher margin for Robotics than we saw in the Machine Automation during this period. On the revenues, might look a little bit, but I think they did a good job in Robotics because if you exclude the system business in robotics, they actually had 15% increase in revenue. So things are moving quite good in that. The problem we have, and I think that's probably the division that have the biggest problem today is Machine Automation, where they, in their products, have a lot of semiconductors and they are really being hampered with supplies, which shows that, yes, they had good orders of about 40%, but it could have been much, much higher if we booked everything. We've been very restrictive to book orders at this time and to sort out the production. And that's where we see the biggest challenges during this quarter and also the quarter going forward.On the other hand, they have a tight relation with the customers and they are working hard to sort out these supply issues in that business. So it's a little bit of mixed bag. I think Robotics is sticking out more positive and a good development, while we see the biggest supply chain problems in the Machine Automation.

[Ann-Sofie Nordh]

Okay. And we'll follow up straight away with the second question here from James, which he's put through. And it's the revenue challenges in 3Q and 4Q, perhaps a little bit tougher than some others have suggested. Have you benchmarked your sourcing? And do you see areas where ABB could strengthen the chain with triple or more sourcing and more localization?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. I think that the strategy of ABB is clear long before I started, and that is to be global but still local, meaning that we produce our product in the areas actually where we sell the product. So China production for the Chinese markets is in China, U.S. is the same and Europe. So we are quite local today. Of course, when it comes to semiconductors, this is, of course, a global issue which is not related to the way we source in ABB. It's just a shortage, and this is affecting all companies that have digital products as ABB has in its portfolio. We need to cope with that until the supply meets the demand. And I know that the suppliers are working hard.And we can see improvement in certain suppliers, while other ones might be having some more problem. But I think it's a correct observation that going forward on the supply, I think we all learned that single sourcing is not the way to go. You need to have multiple sources where you can buy some of them close and some of them maybe in more cost-efficient countries. So yes, I think our businesses are learning. But I still see the execution in this tough time is excellent from the businesses. And I think here, the decentralization has really helped.Timo, do you want to add a little bit there?

[Timo J. Ihamuotila, Chief Financial Officer]

Yes, because this was -- yes, thanks for the question. Because this was a bit of a comparison question, so I just want to highlight that when you look at our order backlog, it has gone up from last year $2.1 billion to $16 billion. And we are really not seeing order cancellations. And of course, if our situation would be like very different from other people's situations, we think that they would go elsewhere, which is not happening. So in that sense, we think that the quality of the order book is solid. We could have taken even a bit more orders, as Björn said, and I think this bodes well [ than ] moving forward into 2022, 2023.

[Ann-Sofie Nordh]

Okay. Thank you. And we go back to a question from the telephone line, and we ask you to open the line for Daniela at Goldman Sachs, please.

[Daniela C. R. de Carvalho e Costa]

I hope you can hear me.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes, we do.

[Ann-Sofie Nordh]

We can hear you.

[Daniela C. R. de Carvalho e Costa]

Perfect. So I wanted to ask two things. One, first, I don't think we've talked today a lot yet about sort of the portfolio plans and particularly how you're progressing on the processes for EV-charging and Turbocharging. And also, I think you were doing a review of Process Automation. So my first question would be regarding that.And then the second one, well, I think you talked part of -- through part of what I wanted to ask, but still just a final confirmation on -- it sounds like you're lowering guidance on 2021 on organic growth, is this purely supply chain-driven not really an underlying demand worry? Shall we expect a full compensation of that into 2022? Or you think that there's still some risk that there's maybe some speculative orders on it or it might not be able to solve the situation on supply chains that timely in 2022 and demand could erode?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. Let me start with the demand situation and the orders and taking down some of the guidance there. It's a clear supply chain thing. Orders books is stronger than we could imagine, and we expect that this strong order situation will continue. Then comes, of course, the question, is the order book and also some of that for building inventory among our customer? We try to scrutinize that as much as we can and we are being very restrictive in booking orders that we believe would end up on the shelf, to put it from that. So yes, guys take it down, it's a pure production and supply things. And of course, having an order book over $16 billion, we will continue to deliver on that order book and all new orders that are coming in, of course, going forward. So we do not believe that there will be any lost business out of that. Timo said that the quality of the order book is great. So that is from that.Let's then just take first on Process Automation, and I know there are some rumors about the review of that business. And it's, of course, clear, that's my -- part of my job of learning more about the different businesses we have. And we have spent quite a lot of time understanding the strategies, looking at the potential going forward. And we are very convinced that Process Automation is part of our purpose. And we also believe that there is a good potential to improve performance in many of these businesses going forward. So that is absolutely not on our agenda when it comes to Process Automation or any kind of divestment of that. So it's part of ABB and will continue, at least in the near future, to be a part of that.Then on the other 2 businesses and the Turbo, we -- during Q3, we completed the sale of Dodge and we expect to close it now during Q4. Fantastic sale. So I think, good for Dodge and good for ABB and good for ABB shareholders. So we are very pleased with that. Now we're working hard to separate the Turbo business and that is going well. And we are, at this moment, coming closer. I think maybe in this quarter, in the beginning or next, we will have this prospect. We're still going at dual track, as we said from the beginning, it means we are checking up if we have some industrial or financial buyers who would be prepared to pay for these assets in the right way. But our preferred way, as we said before, is to do a spinoff to the shareholders. So -- but the final decision of that will probably take place during the first quarter. But separation is going. And during next year, we should see a finalization of that divestment.On the E-mobility, what can I say? It's an enormous market. Our operations are doing well. We see growth well over 100% quarter by quarter by quarter, and we think that this business has a tremendous future. So what are we doing now? We are separating the business. We are looking for a new chairman, which the process is going on. And we are still waiting for a final decision how to do it. But we do expect, if plans goes as we want to, to do this IPO during first half of the year. So things are moving well there. And we think this can be an interesting growth vehicle going forward. I think I caught those -- was that okay, Daniela?

[Daniela C. R. de Carvalho e Costa]

Yes, that answered.

[Ann-Sofie Nordh]

Thank you. And we will take another question from the online option. And it's -- we have a question -- a couple of questions here actually coming from Guillermo at UBS. And if we start with the book-to-bill, it's expanding and lead times as well. How is the backlog margin quality evolving?

[Björn Klas Otto Rosengren, Chief Executive Officer]

I'll give that actually to Timo.

[Timo J. Ihamuotila, Chief Financial Officer]

Yes. Thanks, Guillermo, for the question. So maybe I'll start with some facts going into Q4. So when we look at what's our estimate on how much would be coming from the backlog going into Q4 compared to what would be, in a way, normal year, we're maybe sort of 8% to 9% higher. So in that sense, if the supply stuff would start to ease, that will mean that our revenue would have some upside. But at the best of our knowledge, we are, of course, where we are at the moment. But we have a stronger backlog going into Q4 than we would normally have.Then when you look at the backlog margin, and this is actually a really great development because we follow, of course, the operational gross margin, we follow the order gross margin and then the backlog gross margin. And both order gross margin as well as backlog gross margin have been moving up, and it's particularly evident in the Robotics business. Also evident, for example, in PA. So also from a margin, call it, perspective, the backlog is moving to the right direction.

[Ann-Sofie Nordh]

Very good. And we follow up, I think, with another question for Timo, since it's your favorite topic of cash flow. How sustainable is the strong cash flow going into Q4 and the beginning of 2022?

[Timo J. Ihamuotila, Chief Financial Officer]

Okay. Thanks for the question. So I think after 2 years of quite a bit of work on changing the cash dynamics of this company, 2019, 2020, were, of course, somewhat unusual regarding cash, we are now coming to what this company should be able to deliver on cash. And in that sense, we are in a situation where if the earnings improve, the cash flow will improve. And we, I think, still have some work to do in net working capital. So if you just look at this first 9 months -- and I'll go to free cash flow directly because I know that's the sort of the interest out there. So we are at $1.9 billion of free cash flow now for the first 9 months.Last year, full year was about $1 billion. And we would expect to have a good cash quarter Q4 as well, so let's see where it lands. But I would hope to see us on this, let's say, $2.5 billion, something like that, as free cash flow for the full year. And if that happens, then, of course, we are in a very different situation, for example, on the dividend payout ratios and those kind of situations. And we continue to have a strong balance sheet, which we'll then continue to invest in line with our capital allocation principles.

[Ann-Sofie Nordh]

Very good. And we'll open up the line from Alex at Bank of America Merrill Lynch. Can you hear us, Alex, since that seems to be the topic of the day?

[Alexander Stuart Virgo, Director]

I can, indeed, Ann-Sofie, and I hope everybody can hear us as well. I guess I wanted to just touch a little bit more on China and perhaps less about the supply chain itself and more about power outages and the impact that the power supply situation is having on you. And I wonder whether I could push you, Timo, for a guess or a guesstimate, I should say, is maybe a better way of putting it, on the actual impact in your revenues in H2 from all of these sorts of things put together. Will it be a sensible sort of 300 to 400 basis points or so, which is simply just the difference between where we were expecting things to be for the full year end and the bottom end of your range? I just wanted to push you for a best guess if I could, please.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you, Alex. I can maybe start the question and maybe then Timo can follow up on that part. I think year-to-date, we have not had any effect because of power shortages in China. We have had a lot of COVID tests we have in the part, which might have affected somewhat production levels, at least made it a little bit more complicated. There might be some suppliers who have had some effect in the southern part of China. But so far, we wouldn't say that power shortages have had any effect.Going forward, I think that is a little bit premature to say if it will or not. China is an important market. It stands for more than 15%, 16% of our revenues and we have, of course, a lot of production for that market. So it is important that China continues to develop. The orders are -- they are very strong and continue to be a strong demand in the market. And so far, our productions have been able to deliver in line with that.

[Timo J. Ihamuotila, Chief Financial Officer]

Yes. Maybe I'll just comment a little bit on this as well. So first of all, when you look at the China order growth and then when you compare it to, for example, U.S. or Germany, so the dynamics are approximately as follows. China is up, as Björn said, 8%, 9%. So talking about '20, coming from '19, '20 to '21. And then when you look at Germany and U.S., it's pretty much down 10%, up 30%. So all of these markets are on this 2-year period developing pretty much in a similar way, if you take the 2-year stretch, and that shows that we really have a strong demand picture in our main markets. And it's actually fairly similar when you take the COVID impact out.And then when you look at China, on the revenue side, in China, we have, I'll just give you one example, a situation where, for example, in drive products, very strong market in China. We have simply not been able to get all the product out. We have also managed the distribution channel very well. And that is one of the reasons why the revenue is now down. And when that corrects itself, we would expect to see the revenue pick up in line with the order or the demand picture.

[Ann-Sofie Nordh]

Does that answer your question, Alex? I hope so.

[Alexander Stuart Virgo, Director]

As well as can be expected.

[Ann-Sofie Nordh]

Thank you. And we open up the line for Joe at Cowen and Co. Are you there, Joe?

[Joseph Craig Giordano, MD & Senior Analyst]

I'm here, can you hear me?

[Ann-Sofie Nordh]

We can.

[Björn Klas Otto Rosengren, Chief Executive Officer]

We do sure can.

[Joseph Craig Giordano, MD & Senior Analyst]

Great. You mentioned customers in Motion just not accepting delivery right now. Can you just talk about the dynamics there? Is it part of a larger project where the other pieces aren't available? Like how should we think about why that's happening and how you think that plays out into 4Q?

[Timo J. Ihamuotila, Chief Financial Officer]

Was this -- this was in relation to the previous answer?

[Björn Klas Otto Rosengren, Chief Executive Officer]

No, I think it was Motion. Did you say Motion or what did you...

[Timo J. Ihamuotila, Chief Financial Officer]

I just said drive products in China have had some component shortage issues on the semiconductors, which impacted the China revenue.

[Björn Klas Otto Rosengren, Chief Executive Officer]

But I think over...

[Joseph Craig Giordano, MD & Senior Analyst]

Yes, I thought I heard earlier that finished products that you guys -- your customers weren't taking, not that you weren't able to source -- that you weren't able to deliver. Maybe I misheard that. Is that true?

[Timo J. Ihamuotila, Chief Financial Officer]

Yes, you are talking about the customer acceptance topic. Again, this has nothing to do with the quality of the backlog. This is an issue in a couple of places where you would deliver into the project, but somebody else is not delivering in time and then the customer says, "Well, maybe I could take that a little bit later." So again, it's quite normal behavior in this kind of situation. It doesn't mean at all that our backlog quality wouldn't be where it is. But we had some of these impacts as well during the quarter when you look at the revenue.

[Björn Klas Otto Rosengren, Chief Executive Officer]

And that's more related to project orders actually. I think that's not so much on components.

[Timo J. Ihamuotila, Chief Financial Officer]

Exactly.

[Joseph Craig Giordano, MD & Senior Analyst]

Right. That's -- okay, that's kind of what I thought. Is there any -- how do your guys think about that dynamic in 4Q, kind of similar to 3Q as well, like the projects are still held up by others in some cases?

[Timo J. Ihamuotila, Chief Financial Officer]

Well, I mean we have taken, as we said today, all these impacts into account to our best ability, so this impact as well. And as I said, we are going into Q4 with a higher backlog conversion expected than we did last year. So if this starts to ease, there should be upside on the revenue.

[Joseph Craig Giordano, MD & Senior Analyst]

That's fair. Okay. Last question. Do you guys plan on or have you already started integrating the ASTI Robotics into your own manufacturing facilities?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes, I can talk a little bit about that. Yes, it was, of course, completed during the -- both the signing as well as the closing of that acquisition. And it's being integrated. I think for Robotics, this is a perfect fit. This is a good quality company with respected and good products. And they have the ability to utilize the ABB channel globally, and that is what we do. And at the moment, we are also setting up production for these products in the Chinese market. So we'll be able to support that market also. But as you heard earlier, we have quite ambitious plans for this business going forward. And they're excited in Robotics, and it's a great fit.

[Joseph Craig Giordano, MD & Senior Analyst]

Yes. And you'll use them internally, I assume as well, right?

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. This is normal in ABB. So we're utilizing both Automation Products and Robotics in more or less all our factories. So yes, these AGVs is part in many of these factories. And going forward, they will be also used in the -- this new ABB ASTI products.

[Ann-Sofie Nordh]

Thank you, Joe. And now let's see if we have Martin from Citi on the line.

[Martin Wilkie, Managing Director]

It's Martin from Citi, a couple of questions for you. Hopefully you can hear me okay. The first question was on the impact of power up prices on your demand. I mean there have been some questions, I guess, already on how it might impact some of your end markets. But in previous cycle when energy prices have spiked, then some of your products have been more in demand because of efficiency. And I guess into that cost of particularly, I guess, Motion and Electrification. Has there been any indication so far, particularly in Europe with power prices up so much, that we're seeing a pull forward of requests for efficiency-related products? I guess it's relatively early in this price spike, but just to understand a little bit about that.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes, I think it's difficult to say short-term price spikes or long-term need for electrifying many parts of the industry and the world. I think we have said from the beginning that we are well positioned when it comes to electrification in the market with our Electrification product, but also with our Motion products. Even in Process Automation, we are helping many of the large customers to electrify.I think one example was the movie, which I, of course, like very much, about eMining, many of these industries need to go for being more sustainable, and that's why they're going for it be electrified. I think this is going to happen at every mine in the world, and I think ABB is the right partner to help them to drive this change. So yes, we do believe that there will be demand for more electricity long term. But on the other hand, this is maybe a short-term spike and then maybe not so much. Would you like to add, Timo?

[Timo J. Ihamuotila, Chief Financial Officer]

No, I was just going to comment on that. We reviewed, actually in one of our business reviews, just a case like this where all the motors and drives would have been changed for this reason, but of course also because it drives better carbon footprint. So it is happening. Is it only because of the electricity price? Maybe not. But I would just say that if that continues, it will add to the demand picture, as Björn described.

[Martin Wilkie, Managing Director]

Yes. That's great. And I have just one separate question. You mentioned portfolio change already, but just to come back on the Turbo business. I noticed in the end market outlook you gave, the one area that has got fewer dots this quarter compared to previous is conventional generation. Just to clarify what you've seen there. And also, would your view on the end market there change the timing of the potential exit on Turbo? Just to understand if those 2 things might be linked or not.

[Björn Klas Otto Rosengren, Chief Executive Officer]

I think the exit of Turbo is decided. It's just a timing issue when it will be the right and in what direction we will go, if we go for a spin-off or if we go to a sale, so from that perspective. Yes, I mean Turbo is -- I mean, it's a resilient company from the beginning. We saw during COVID that they managed to deliver good margin even if they were somewhat lower than we have seen today. The market has recovered. One big market in this business is the cruising industry. Yes, they are improving services, picking up on that part. In power generation, it's another part where they sit on many of these gas engines around the world. Demand for electricity is going up. So I'm sure that, that has some effect. So yes, the quality of the aftermarket, which is 75% of that business, is developing good. So yes, I think it's a good company. I think it will be a good company standing by itself also.

[Timo J. Ihamuotila, Chief Financial Officer]

Yes. And just to mention, we have had a very strong demand pickup in Turbo during this quarter, and it looks actually quite positive. So if you look at orders, revenue and also margin in Turbo during Q3, they're all moving to the right direction.

[Björn Klas Otto Rosengren, Chief Executive Officer]

It's a great business, but we do not feel that it is part of the ABB purpose.

[Ann-Sofie Nordh]

Thank you. And we'll finish off with a question from Andreas at JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

I've got 2 questions, please. One on your earlier comment on Process Automation and the annual business review there. And obviously, you have spent quite some time with that business in the last few months. Maybe you could share a little bit what you see as what needs to happen there, particularly also when we look at measurement and analytics, which has been maybe a bit of a problem child in terms of where you see the measures and strategy that gets that business closer to where you want it to be and where peers are.And the second question is on sourcing in Discrete Automation. Maybe you could elaborate a little bit more on that. You talked about the semiconductor issue. But we haven't -- obviously, we will see when others report, but we haven't really heard Siemens, Rockwell or Schneider complain as much about their discrete business into the quarter end compared to what you highlighted. Maybe you could help us explain why that could be.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. I think that will be difficult to do when we haven't heard yet. We didn't talk too much about that before coming out with the report. It is pretty clear that they are the one who is getting least supply of semiconductors. And of course, they are fighting hard with suppliers to get them and to be able to supply the products. It is tough for them, of course, not being the largest in the market, even if they are very strong in their machine automation segment in the part, and they just need to deal with that. And they spent quite a lot of time to sort out the issues. And going forward, they will slowly pick this up and we will go forward and we will be able to supply the customers. But yes, it's a challenging period.

[Timo J. Ihamuotila, Chief Financial Officer]

And again, there are no order cancellations.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Yes. I mean they have a very strong -- I mean, they work a lot with the OEM customers, of course, that is we're talking about machine builders. So they have a very strong and long relation with them, and so far, no cancellation there. So they're coping it -- with it together. And the machine supply is, of course, also having issues, probably not only with us, but maybe with other components and products also, so understanding that.If you talk a little bit about Process Automation, I kind of like to talk about this subject. And as you know from last year and being quite new in the company, and I thought that the Process Automation was actually delivering lower deliveries than many of our other business areas. So for me, it's, of course, important to understand the dynamic in this business and also the potential improvement where we can develop this business.So we spent quite a lot of time during the last 2 quarters with this business. And I think we feel that these are basically good businesses. We think there is improvement when it comes to operational performance in some of these businesses. And I think these divisions are working hard. And of course, I get very happy when I see a quarter where all the businesses are improving and delivering more than double digits. And I think the potential here is quite good. And we have put up strong targets and they have put up a good challenge to improve these performances during the coming years. So I think we have a lot of good stuff coming out from these businesses.On measurements and analytics, yes, it's correct, we talked about it last. We had the management change in this. We have a good management in place, and they are dealing with some of the issues. I think it's a mixed bag here. You have the instrumentation part and you have the analytics part. It's like 2 businesses. The analytics part is very much related to climate change. The way to analyze these gases in different kind of businesses is to cope with a lot of the regulations that are actually being enforced in the market. And this business is doing great, a lot of service, a lot of exciting products and solutions. And I'm sure we'll talk more about that during the Capital Market Day.Then on the instrumentation side, this is a little bit more me-too product, where we have a little bit more challenging getting the full value out of this. On the other hand, I think we have a lot of new innovations, a lot of good stuff in that business. So we'll see how that will be developed going forward. But we've seen a good improvement compared to last year, both in measurement and analytics, and they were quite strong during this quarter. So I think there are upside also there going forward. So I think we should take it off the table. PA, Process Automation, is part of the ABB purpose and will continue to develop during the coming years.

[Ann-Sofie Nordh]

And with that, we round off this session. Thank you very much for joining us today. We apologize for the sound challenges early on in the session. And we will meet again in about a quarter's time to talk about the fourth quarter results. But before that, we hope to see you at our Capital Markets Day on the 7th of December, either here in Zurich or virtually behind the screen, so to speak. Until then, take care, and thanks for today.

[Björn Klas Otto Rosengren, Chief Executive Officer]

Thank you.

[Timo J. Ihamuotila, Chief Financial Officer]

Thank you.