Abb Ltd

SIX:ABBN

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to the Q4 full year 2019 results analyst conference call. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded [Operator Instructions] At this time, it's my pleasure to hand over to Jessica Mitchell, Head of Investor Relations. Please go ahead, madam.

[Jessica Mitchell, Head of Investor Relations]

Good morning, ladies and gentlemen. Welcome to ABB's Full Year and Fourth Quarter 2019 Results Conference Call and Webcast. The press release and financial information documents were published this morning at 7:00 and can be found on our website, along with this results presentation. Following our presentation, we will open the lines for your questions. With me today are ABB's Chairman and current Chief Executive Officer, Peter Voser; and ABB's Chief Financial Officer, Timo Ihamuotila. Before we begin, I would like to draw your attention to the important information regarding safe harbor notices and our use of non-GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. With that said, let me hand you over to Peter.

[Peter Robert Voser, CEO & Chairman]

Thank you, Jess, and a warm welcome to all. We will start with an overview of ABB's results for the full year 2019. Timo will provide a detailed review of the year and the fourth quarter results. Between us, we will provide some direction on ABB's financial prospects, market outlook and strategic priorities for 2020. As usual, there will be plenty of time to take your questions at the end. Starting with Slide 4, where we summarize the 2019 results. Total orders of $28.6 billion and revenues of $28 billion were both up 1% year-on-year on a comparable basis. The operational EBITDA margin expanded 20 basis points to 11.1%. Cash flow from operating activities was $2.3 billion, down 20%. Cash flow from continuing operating activities was reassuringly solid at $1.9 billion, including outflows related to the ABB-OS simplification program and Power Grids and solar inverter business, carve-out processes, totaling over $200 million. Our group's operational EPS of $1.24 was 7% lower on a constant currency basis while the basic EPS results of $0.67 was 34% lower year-on-year, including the impact of costs related to our transformation. Charges for the exit from the solar inverters business, a lower result from discontinued operations and additional taxes related to the carve-out of Power Grids' operations. All told, we sustained the running of our business in the context of a much tougher market, slightly improving revenues and operating margins while undertaking a very extensive transformation. We continued to strengthen our portfolio, including with the agreed sale of solar inverters and our share in 2 JVs businesses within the Electrification business in China. We also continued our organic growth investments in a disciplined way. On a comparable basis, R&D investments rose 5%, while SG&A spend was only up 1%, with G&A, notably being reduced by 6% year-on-year. In short, we are seeing resilience in our business and are starting to see the effect of the improvements we are making to our operating model. Turning to Slide 5, and progress with our transformation. The carve-out of Power Grids and the implementation of our new operating system, ABB-OS, are firmly on track. The divestment of Power Grids is on schedule to close at the end of the second quarter 2020, with the stand-alone business legally established and resource transferred to the future Power Grids joint venture substantially complete. By around year-end 2019, we had put into effect our future operating model. This included collapsing our regional structures and transferring our country structures and the vast majority of centrally managed functional activities into the 4 businesses. We now have more customer-focused and empowered businesses and a much leaner corporate organization. Significantly, we have a new performance management process in place for 2020 for the businesses. I will return to this later in today's presentation. We have achieved our run rate savings goal from the ABB-OS simplification program for 2019 and continue to work steadily towards our aim of around $500 million in run rate cost reductions across the group from the program during 2021. Timo will come back to these items a little later. For now, let me hand over to him to cover the results in more details.

[Timo J. Ihamuotila, Executive VP & CFO]

Thanks, Peter, and good morning from my side as well. Beginning on Slide 7, you can see a summary of our full year 2019 group and business results. As you can see, 3 of our 4 businesses reported steady or moderate order and revenue development in 2019, largely offset by a weak results from the Robotics & Discrete Automation business. Across the board, these developments reflect some softening in global economic growth seen in 2019, while more substantial headwinds in discrete markets, particularly automotive and machine builders, had a marked impact in RS order and revenue decline. The group's book-to-bill ratio was 1.02, just shy of 2018's 1.03, but encouragingly, still over 1. The group's operational EBITA margin of 11.1%, improved by 20 basis points. Margins for the group were supported by solid execution in Motion as well as improvements in our corporate and other results, but were hampered by some specific headwinds in our other businesses. In Electrification, this included the full year dilutive impact from GEIS' consolidation compared with 6 months of dilution in the previous year. In Industrial Automation, margins were impacted specifically by a large project revaluation in the third quarter as well as adverse mix. Margins in Robotics & Discrete Automation were impacted by lower volumes and adverse mix stemming from the downturn in its key end markets. Now to the Q4 results on Slide 8. During the quarter, the businesses faced slowing short-cycle industrial demand, mainly in the U.S., and ongoing market headwinds in discrete industries, which dampened both top line performance, operating margins, particularly in Robotics & Discrete Automation. Overall, orders grew 1% with order backlog showing a 5% improvement year-on-year, while revenues were 2% lower, also reflecting a tough comparison base for select businesses and regions. The operational EBITDA margin of 10.1% expanded 220 basis points year-on-year driven largely by lower charges for noncore projects and good progress on stranded cost elimination, which are both reflected in the improved corporate and other operational EBITA result. Moving to below the line. Major nonoperational items include restructuring and related costs of $99 million, including $64 million towards our simplification program, and Power Grids-related transaction and separation costs of $39 million. In addition, we booked a combined $178 million gain from the sale of ABB's share in 2 Chinese joint ventures, an adjustment to the price paid for GEIS and a reduction in the loss on the planned divestment of the solar inverter business. Our discontinued operations reported $50 million net income, reflecting restructuring, carve-out-related taxes and transaction costs. Looking to earnings, basic EPS was $0.15, 2 percentage points higher year-on-year. The operational EPS of $0.27 declined 11% year-on-year. A reconciliation of our operational and basic EPS calculation is included in the appendix to this presentation. Finally, cash flow from operating activities was $1.9 billion, up 2%. This included cash outflows for restructuring and the Power Grids carve-out as well as healthy net working capital development. ABB's regional and country order trends for the fourth quarter are illustrated on Slide 9. In the Americas, orders declined 8% against a tough comparable period, but also reflecting a weakening U.S. economy. Orders from the United States were 7% lower. In Europe, orders were 16% higher, with mixed performance at the country level. Switzerland recorded excellent order growth, led by Industrial Automation and Motion. Good demand was also evident from Sweden and Finland, while orders in Italy, Norway and the Netherlands declined when compared to prior year period. In Germany, orders were 37% higher with good launch orders in Industrial Automation and market share gains for Robotics & Discrete Automation. Lastly, you can see orders in Asia, the Middle East and Africa were 5% lower. Order growth was strong in South Korea and Singapore and robust in China but weaker in markets such as India, Japan and Australia. Looking more closely at China, orders were up 1% based on strong broad-based growth across all businesses with the exception of Robotics & Discrete Automation where challenges in automotive and a tough comparison base were evident. I will now provide a closer look at the fourth quarter performance of each of our businesses, starting with Electrification on Slide 10. Electrification's orders were up 3%, benefiting from strong demand for solutions, while general industrial activity slowed. Of note, data centers continued to progress well with 2019 being the fifth consecutive year of double-digit growth. Order growth in the quarter was also strong from utilities, including wind, and electric transport markets, including rail. Meanwhile, buildings were mixed across 3 markets. We saw a softening in China with U.S. holding and a positive contribution from Germany. Revenues were steady, reflecting weaker short-cycle demand, while the order backlog rose 9% year-on-year. Electrification's operational EBITA margin expanded 104 basis points year-on-year, aided by continued progress in the GEIS integration, encouraging improvement in the margins of installation products and good pricing and cost management. As a reminder, we expect Electrification's margin to get back to its 15% to 19% target margin corridor during the year as we realize the cost synergies from GEIS integration, continued improvements in installation products and ongoing simplification savings. Next on Slide 11, we have Industrial Automation or IA. IA's orders grew 5%, supported by large orders for specialty vessels, rounding out an altogether strong year for marine activity. Across the energy sector, large orders remain subject to project postponements, and we continue to see a competitive pricing behavior. Conventional power generation continues to be weak. Elsewhere, process solutions remain supported by solid demand in pulp and paper and LNG sectors. Revenues were 1% lower, a function of the order backlog going into the quarter and lower book and bill. The order backlog rose 2%. The operational EBITA margin of 12.1% was 150 basis points lower. Margins were impacted by lower volumes, unfavorable business mix and operational execution as well as investments in growth. Looking to Q1, we expect orders and revenues in IA to remain highly sensitive to end market developments with the business challenged to hold revenues and margins steady year-on-year against tough comparisons. As we move through the year, support for the business will come from a higher gross margin backlog, which has been rebuilding over 2018 and 2019 and an encouraging pipeline of large order opportunities that the business is working hard to develop. Let's turn to Motion on Slide 12, which continues to deliver steady execution. Total orders rose 5%, led by growth in drive solutions, especially for rail and wind in Europe and water and wastewater applications in EMEA. Within the motors business, strong demand for large motors was offset by weaker demand for smaller motors, particularly in the U.S.Revenues were steady, reflecting a tough comparison base, while the order backlog increased strongly by 9%. The operational EBITA margin of 15.4% expanded 50 basis points compared to the prior year period, supported by positive mix and good operational performance. For the Q1 period, we look for steady performance from this business. On Slide 13, we turn to the Robotics & Discrete Automation business. Orders for Q4 were 18% lower, reflecting a very challenging market and a tough comparison base. As already noted, the robotics industry continues to face headwinds in the traditional automotive and auto-related industries particularly in China. Revenues declined 10%, impacted by lower book and bill. The order backlog ended 2019 5% lower year-on-year. Margins were, in turn, impacted by lower volumes and adverse mix, partly mitigated by a strong focus on cost-saving measures in response to the environment. The operational EBITA margin of 11% was 210 basis points lower than the prior year. Looking ahead, the automotive sector, where we have material exposure, is expected to remain subdued into 2020. On the other hand, there are positive signs from electronics and good growth opportunities in new markets like logistics as well as for service robotics. In all, continued market headwinds, together with a lower backlog, are expected to continue to hinder outcomes in RA, at least through the first half of 2020. That said, our confidence in the long-term growth prospects of RA remain unchanged. And we look forward to showing you the many exciting developments in this business at our Robotics & Discrete Automation Investor Day at the end of this month. Let's now turn to Slide 14 to put in perspective some of the material impact on the group's margin for the quarter and year as a whole. We highlight here offsets to our margin development that have arisen from ABB's transformation. These include costs relating to divesting Power Grids, exiting low-content EPC activities and the full year impact of GEIS consolidation. For 2018 and 2019, excluding these impacts, which would allow for better comparison, the operating margin would have been approximately the same in both years, despite the deterioration in some of our end markets. Without this impact, which we aim to have largely eliminated by end of 2021, the full year operating margin for the group is around the bottom end of our medium-term target margin corridor of 13% to 16%. Turning to Slide 15, where we provide an update on the implementation of ABB's new operating system. The implementation of ABB always has gone according to plan. During the year, savings from the simplification program reached the $150 million to $200 million run rate targeted by 2019. To date, we have dismantled regional structures and integrated over 100 countries as well as all corporate business functions into the businesses, creating a truly pre-business-led organization. The corporate functional head count is less than 10% of its size prior to ABB-OS and the ABB Group's total head count within continuing operations has reduced by approximately 3,900 employees in the past 12 months, partly also due to stranded cost elimination. More importantly, what we see emerging is an organization that is simpler, more agile and more customer focused and thus better aligned to drive profitable growth. We continue to guide for $500 million in run rate savings from the simplification program during 2021 with the next phase driven more by the businesses as part of their business plans. Moving on to Slide 16. You can see in more detail the impact of simplification at the corporate level with corporate and other operational EBITA decreasing by around $300 million over the year. In 2019, stranded costs of $72 million were eliminated, and we expect the vast majority to be eliminated by the closing of the Power Grids transaction with an estimated approximately $50 million still reflected for the year 2020. Operational costs and charges from the legacy noncore business declined by $146 million and we aim to fully exit all noncore activities by end of 2021. Our running or ongoing corporate expenses fell $80 million in 2019 as we implemented our new organizational structure. We continue to work towards our medium-term corporate and other operational EBITA run rate target of $300 million, with expectation for corporate and other of approximately $600 million in full year 2020. We'll turn now to Slide 17, which provides some direction on our key metrics for 2020. Starting with revenues. We look for the outcome to be steady or slightly up on a comparable basis, supported by the order backlog, even though certain end markets remain challenged, at least for the short term. ABB expects its annual operational EBITDA margin to improve, weighted to the second half, aided by improved margins in the Electrification business, the elimination of the vast majority of remaining stranded costs and further benefits from ABB's simplification program. In keeping with our track record, we expect solid cash generation from continuing operating activities, not including cash outflows for the simplification program and carve-out activities and associated cash tax impact. CapEx is expected to be in the region of $800 million, and we should have an effective tax rate of approximately 27%, plus tax impact from the sale of Power Grids of $400 million to $500 million. Considering the tax impact relating to the Power Grids exit in the fourth quarter, which were approximately $150 million, the expected total tax leakage is now approximately $250 million lower than our original guidance. We have also provided the usual framework that details our expectations concerning other material cash and earnings drivers for 2020 in the appendix of this presentation. In addition, with regards to the power grid sale, we very roughly estimate a book gain pretax of around $5 billion. Our guidance reflects the progress we expect in our continued transformation as well as our current economic and market outlook, which does not include possible impacts arising from the coronavirus outbreak. And let me now pass the call back to Peter for final remarks.

[Peter Robert Voser, CEO & Chairman]

Thank you, Timo. Let's look at Slide 19. For the year ahead, some sectors and the industries are still developing positively. Nearly 2/3 of the portfolio serves customers in market segments that are steady or robust. However, material challenges remain short-term in conventional power generation, the onshore upstream oil and gas sector, automotive and machine builders markets. Looking to macro indicators and particularly manufacturing PMIs. We know the global economy is fairly balanced between contraction and expansion territory at this juncture. So we have something of a mixed outlook but remain confident in the resilience of our business overall with our sights firmly on delivering above-market growth over the medium term. Technology and innovation are among the most important differentiators positioning us to compete in our markets, no matter the prevailing market conditions. On Slide 20, we show some recent exciting innovations from each of our businesses, which I won't cover in detail. ABB invests continuously in innovation through partnerships, collaborations and ABB Technology Ventures, in addition to in-house R&D and digital spend, which in 2019 was nearly $1.3 billion or 4.5% of revenues. ABB's pursuit of technology leadership is core to ABB. Points that came through strongly in our recent employee survey, and we expect this to remain a key driver of future growth. Turning to Slide 21. We are busy welcoming our new CEO, Björn Rosengren, who will take up the reins officially as CEO on March 1, with myself remaining as Chairman. As well, our executive committee is now smaller, with 8 members compared to 11 previously. Björn's appointment is an important step as we move to a new model of business-led accountability at ABB, and he is already meeting extensively with business leaders and employees across the group. Under Björn's leadership, we expect to drive performance in the quarters ahead, with a shift in culture built or more empowered businesses and our more leaner corporate structure. Through the ongoing implementation of the new operating system, we will continue to embed a strong governance framework to ensure transparency and accountability across the organization. A stronger people agenda is an important part of driving the change. We conducted ABB's first global employee survey in November. We are now taking steps to act on feedback from this survey, looking to energize our employees with a clearer sense of purpose. A new annual incentive scheme for employees has been rolled out allowing each business line to develop simplified, clear targets for its employees, more tightly aligned with relevant strategic and financial goals than previously possible. That brings me lastly on Slide 22 to our summary of our priorities for 2020. We are clear we need to focus on execution. First and foremost, that means improving performance in the businesses by driving top line growth and efficiency while systematically managing our portfolio and continuing to invest in growth. At the same time, we will also continue our transformation, completing the sale of Power Grids, whilst embedding our new performance culture. Significantly, in 2020, ABB will continue to deliver attractive returns to shareholders. The Board has proposed a dividend of 80 rappen. In English, CHF 0.80 for the 2019 year, subject to shareholder approval at our upcoming AGM, with the intention of maintaining the dividend per share at this level after the closing of the Power Grids sale. The Board intends to commence returning to shareholders the net cash proceeds from the sale of Power Grids after the deal closing through a buyback program. We will look to execute this in an efficient and timely way. For the long term, the capital allocation priorities of the group remain unchanged, including our policy of a rising sustainable dividend. And that seems a very good note on which to end. So thank you for your attention. We are now ready to open the line to your questions. And with that, I hand back to Jess.

[Jessica Mitchell, Head of Investor Relations]

Thank you, Peter. Operator, may we have the first question from the lines, please?

[Operator]

[Operator Instructions] The first question comes from Alexander Virgo from Bank of America.

[Alexander Stuart Virgo, Director]

A couple of questions, I suppose, please. I wondered, you called out good traction on corporate costs and the savings in broader simplification plan. And you also mentioned that you've implemented changes to the incentive structure and compensation structures. I wondered if you could talk a little bit about where you're seeing best progress and where you're seeing slower progress on that. I just would be keen to understand how you're seeing the response. And perhaps if that was addressed in the employee survey, how the employees are seeing the changes would be helpful. And then a follow-up question on the GEIS integration. The potential opportunity there, I think, was much more apparent at the Bergamo Day. And I just wondered if you could talk us through the trajectory of the improvements in margins there over the coming few quarters. Particularly, if we see Q4 as the lowest margin in the year, can we see a similar sort of improvement through 2020 as you showed us in 2019?

[Peter Robert Voser, CEO & Chairman]

Okay. Timo take the first one on GEIS, I take the incentive one. So...

[Timo J. Ihamuotila, Executive VP & CFO]

Okay. So maybe I'll start with the corporate cost and GEIS. Thanks, Alex. So when we look at the overall corporate costs and the savings program, so I'll just give some of the highlights overall how the corporate line has moved and then talk a little bit about the savings. And then finally, talk a little about how that is moving to the businesses. But if you first look at the other 2 items in the corporate cost, noncore and stranded cost. So we went down about $150 million in noncore expenses and stranded cost elimination came out at $72 million compared to our $60 million target. And then when we look at the rest of corporate, that came down about $80 million. And of course, part of the so-called ABB operating system savings, our target run rate of $150 million to $200 million, which we reached, is in that line item. And then the rest of the savings are visible in the businesses already. Now some other points to mention maybe here. We went down about 3,900 people in the continuing operations. Some of these people have moved to Power Grids as well. So part of the stranded cost elimination, but quite a few have also left the company. And then when we look at this now going forward, when you ask about the velocity of the change or the implementation, there are areas like real estate and country organizations which we have now moved to the businesses. And for example, in real estate and in other business areas, this will now become more and more business plan execution for the businesses. And in that way, part of continuous improvement for the company. And then maybe I'll comment quickly on the GEIS, and then hand over to you, Peter, on the incentives. So on GEIS, we are on track on the cost savings expected from cost synergies as we have said, and we expect that to be an important contribution when we target to get Electrification business back to its target margin corridor of 15% to 19% during this year. But as we have integrated this is now into the 3 business lines in Electrification, we are no longer following that separately. We are making, as I said, good progress but we are looking that as one enabler besides, as we mentioned also have seen improvement in the installation product business. Of course, lower exit is also part of those tools and then improving the business overall in Electrification, where we have been particularly pleased during the 2019 on the longer cycle business of distribution solutions improving its margin performance.

[Peter Robert Voser, CEO & Chairman]

Yes. Thanks, Timo. And then on the incentive, what we have done in 2019 is completely redesigned our performance management system, but also the performance plan setting, which means we have taken all of our business lines. So that's the level below the 4 businesses, which we have because these are global business lines. So that's where the accountability and the empowerment sits now to run on a global basis these businesses with full accountability. We have taken all of these business lines, global businesses and put them into some strategic buckets on how we want to run them going forward and all the KPIS, but also the strategic targets like resources, like R&D as well, like cash flow conversion targets, et cetera, returns. So return on capital employed or margin targets. They are now set by -- on a business line level and then actually driven down into those business lines from that scorecard or from that annual incentive plan. There is obviously also an annual incentive plan then for the 4 businesses. But that's more or less an amalgamation, obviously, of the business lines they have. But we have also categorized them and gave clear instructions. The only key group target, which we keep for everybody both on the functional side, but also in the business and the business line side is actually the return on capital employed. So we lifted that up to a group target because it captures best actually the use of, let's say, the capital investments, it's the margin and the bottom line delivery. So it gives us actually the best year from a corporate perspective to run the group. Now that has all been implemented. It has been rolled out, was approved by the Board as well and these are now the targets for 2020. That will then also drive the remuneration package of all of the top players in the company. So that's the changes which we have implemented in the, what we call, the short-term bonus side, which is an annual target. In the long-term incentive, we have not changed our program because we think we are capturing all the elements, which we want to drive strategically with the 2 elements, which we have there. One is total shareholder returns, which aligns us obviously with the shareholders. And then the EPS side, on the other side, because EPS, again, is the proxy of many things, which we do strategically to drive the valuation of the group. So this has been completely designed and rolled out as part of this, which is a smaller one, but we also have moved away from doing budgets for the year. We are moving into a rolling forecast system, where we are just more agile and more decisive by business line, but also by business empire for ABB as a group. So we are really putting speed and agile emphasis and accountability into that system as well. This will be further explained in the compensation report, which will come out in a few weeks' time.

[Operator]

The next question comes from Guillermo Peigneux from UBS.

[Guillermo Peigneux-Lojo]

Just wanted to ask 2 questions related to China, really. The first is regarding Electrification and Robotics & Discrete Automation. Can you give us a little bit of feeling about how you saw the progression through the quarter, especially on EL, which seems to be accelerating, versus the 3Q comments that we heard before. And with regards to Robotics, I guess, wanted to see how big is the other part of -- the nonautomotive part of Robotics & Discrete Automation in China? And how much is growing, as we speak, if you could give an indication of what kind of growth you're seeing there? That's the first question.And the second question is for us to remind a little bit about the plant that you're building in China and I have 3 related topics around it is, first, about the timing. Second, can you frame how much capacity does it represent to China? And the third question is regarding the end markets that you will serve with that capacity. Just want to understand how the mix will change as you build this plant and ramp up production at some point?

[Peter Robert Voser, CEO & Chairman]

Okay. Do you want to take one, number one on the robotics side? Let me just say, from a general point of view in the way we run China, which is the bigger question on it. We had the fourth quarter, which was stabilizing after Q3 in China. So apart from Robotics & Discrete, all the others had actually very strong growth, and that was positive to see, which then as a net number, as Timo mentioned, resulted into 1% order growth there. That continued into 2020, the first few weeks but then started, obviously, to change with the Chinese New Year, where the coronavirus, obviously, was starting to have an effect. We can talk about that later, so let's focus now on a little bit more color on the robotics and also the timing on capacity, too. And for that, over to Timo.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Thanks, Peter. So in China, in particular, in Robotics and Automation. So automotive in China continues to be the biggest part, and there was a significant decline on that area in China, I would say, even more than globally in automotive. Actually, in automotive, for example, in Germany, we made good progress and actually gained share, but China, it is really the market. On the other hand, we are seeing actually positive signs on other parts of the robotics and also discrete automation market. So both for D&R, we are seeing some positive signs. And then also, especially in the consumer electronics manufacturing, we are seeing some positive signs in China. So it is really very dual but the automotive is still bigger. And then regarding the plant, I don't think we have much else to report than earlier, i.e., we continue to build the plant, and we, of course, look to take into account the market environment on how we execute the CapEx regarding the plant, and that plant is serving, of course, China, but also markets outside China. As you know, we have in robotics, 3 main manufacturing hubs, if you want to call it such, Sweden, China and then in the U.S.

[Peter Robert Voser, CEO & Chairman]

Let me maybe just add 2 things here. One is just as a reminder, we are building this new plant, but we will actually, therefore, close the old one. So that has also to be taken into account. And secondly, the number which was mentioned in the past, was $150 million but only $50 million of that is actually capital expenditures. The remainder of $100 million is actually lease payments over the years to come. And from the $50 million, it's less than half will actually be spent in 2020, which also gives us flexibility in terms of how this specific anti-cyclical investments, but we are absolutely convinced on the longer-term market in China and also in Asia. Because if you look at the key indicators like how many robots you have for 10,000 blue collar workers, for example. China is nowhere near where the most advanced nations are. So the countries around China are exactly the same. So I think both China demand and also regional demand will be very vital on this one. And that's why we're also investing at the moment.

[Jessica Mitchell, Head of Investor Relations]

[Operator Instructions]

[Operator]

The next question comes from Andreas Willi from JPMorgan.

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

My question on the guidance you've given for 2020 that you aim to improve EBITA or operating EBITA margins versus 2019. Maybe you could comment on this also on an underlying basis, given that you will probably get around $200 million from the lower corporate and about $60 million. You had a one-off in '19 in IA in Q3. Do you also expect to improve underlying margins in 2020 versus 2019, excluding those $260 million?

[Timo J. Ihamuotila, Executive VP & CFO]

Okay. Thanks, Andreas. Timo here. So yes, you are correct to point out that we have some tailwinds into the margin coming from those 2 topics you mentioned, particularly the stranded costs, which we expect to be about $175 million lower and then also the charge, so that would be maybe altogether about 80 basis points tailwind going in. Now we would expect some margin improvement in Electrification because we are targeting to get back to the target margin corridor. And then we, of course, look to improve as much as possible in the other businesses, I would say, looking at the Robotics & Discrete Automation, in particular, that is likely going to be rather a headwind than a tailwind in the margin accretion topic. So that's where we are and we look at the headwinds and tailwinds to the operational EBITDA margin going into 2020.

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

And just a clarification on corporate, the $300 million target you have. You had said in the past that $100 million of corporate expense that gets allocated to divisions, which benefits that reduction to $300 million. Has that EUR 100 million allocation already happened or when is that happening?

[Timo J. Ihamuotila, Executive VP & CFO]

So first of all, that was a rough estimate, which we gave at the start of the program. So there has been some cost moving into the businesses, but we would expect during the year that then the additional savings, which we are driving would pretty much counterbalance this. So that's our sort of base equation on the model and that also impacts slightly the fact that we expect the pickup on the margin to be a bit more second half.

[Operator]

The next question comes from Alasdair Leslie from Societe Generale.

[Alasdair Leslie, Equity Analyst]

Just a follow-up on the margin question, specifically for Industrial Automation. Appreciate, obviously, there's been some one-off negative effects from revaluations. But the margin trend has been quite weak for a few consecutive quarters now. I'm just wondering about the triggers ready for that to change. So maybe you can help us with the drivers for margins into 2020. You kind of highlighted higher gross margins in the backlog. Just wondering whether that's enough to support some underlying margin expansion if we continue to see a sort subdued end market environment, lower project activity. And I think you also talked about a challenging pricing environment. So yes, really just the outlook for margins in IA in 2020.

[Peter Robert Voser, CEO & Chairman]

Yes. I think I'll take this one. I think IA -- let's also go back a little bit because as you may remember, we started, obviously, 2018, and from 2018 into 2019, also with a much lower order backlog. So from that point of view, we have now corrected that in 2019. So we have a stronger backlog there. And as Timo also said in his speech, we are having a gross margin picture there, which is solid and actually higher than in the past. So we have been building that one now in 2019. As part of that, we also have invested in terms of some cost areas in order to actually take on, let's say, the higher order growth, et cetera. We also have, as we say, good visibility on the larger projects. The timing of those is always difficult. So we are working on them. So we would expect some of them to come through in 2020. So which would further actually help us, obviously, to build order backlog, and then start to work it out. Now just remember, in IA, the order backlog doesn't come in the first year. It normally takes a little bit of time before they come in. And we see, obviously, that we are making good progress on those projects as well. Now also I explained beforehand, the way we are now addressing also the business lines. And clearly, in IA, you have got different business lines, and we are driving them in different ways. That adjustment has now also taken place in 2019. So we are driving some of them much more for return on capital employed. They're also the aggregators for some of the other businesses to sell through IA, actually, in projects -- products to our customers. So we are also expecting, as we have prepared all of this, that we will see some margin accretion going into 2020. I think also, let's remind ourselves, which is more a competitive point, actually, we are not always entirely comparable with some of our competitors as we are having much more services, let's say, more than 40%, and maybe 20% in products. And we have very specific markets, even niche markets, where we are very strong. So just keep that in mind when you do the competitive analysis as well. So Timo, do you want to add anything here?

[Timo J. Ihamuotila, Executive VP & CFO]

Well, maybe I can just sort of note as we look back into 2019. So we have, of course, a fairly big change between 2018 and 2019 margins going from 14.1% to 11.7%. And in that delta, we have first about 100 basis points from the project impact. So that would kind of like take it to 12.7%. And then we have said already during last year that we might have had maybe sort of about 100 basis points of tailwinds into 2018 number from older projects, which came from the heyday of the previous, let's call it, oil and gas and LNG situation. So if you look at both of those impacts, then we are maybe sort of 30, 40, 50 basis points, something like that, down and that's, of course, then the equation we'll look to work on now going into 2020.

[Operator]

The next question comes from Shane McKenna from Barclays. We take the next question from Daniela Costa from GS.

[Daniela C. R. de Carvalho e Costa]

As I just have 2 quick questions. One, I was wondering if you could give us an update on the cooperation with Dassault and whether you're seeing sort of similarly results from that and how you're monitoring their progress on that front.And a quick one on the China robotics factory. Just wanted to confirm, is like the factory fully up and running? When the -- or when does that happen? So how should we think about that capacity coming on stream on the back of your big demand commentary? And what's sort of the -- how will the leverage on that materialize?

[Peter Robert Voser, CEO & Chairman]

Thank you. I think I'll give Timo some time to think about Dassault and I take the robotics one. So yes, we had the groundbreaking in September in 2019 on the factory. So that construction is ongoing now. And I think what we also communicated. So this will go into, let's say, the first half of '21 before we finalize that one. So I think that's maybe a good way to look at the capacity additions in the robotics business in China, but also in, let's say, in the Asian area. So no more precise at this stage. We are very early in the construction phase.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Thanks, Daniela. On the Dassault partnership, I don't think we have anything new to report. So from the previous, we follow this as a go-to-market partnership, i.e. we can be a lead for them in the projects. They can be a lead for us in the project, and that's how we look at it, and we develop it from that perspective, of course, in the businesses at the moment. And here, we have Robotics & Discrete Automation being sort of the lead at the moment from ABB side on driving that partnership.

[Operator]

The next question comes from Martin Wilkie from Citi.

[Martin Wilkie, Director]

It's Martin from Citi. Just a question on Motion. You saw an acceleration in orders there. You have highlighted rail. I was intrigued that the end market slide that you put towards the back of the presentation has rail as a yellow end market as opposed to one in the green. And that's slightly odd to what we see with some of your customer base. Just to understand, are there some specifics around what's happening in Motion with the exposure to rail?

[Peter Robert Voser, CEO & Chairman]

Timo can give the details afterwards, but it's quite clear that Motion, we have seen an interesting pickup in the whole rail business from a traction system point of view, and that was clearly also in the fourth quarter on the order side. There were some drivers in there quite clearly. For example, I think Timo highlighted growth also in Switzerland, and that is also rail driven in that sense. So do you want to add anything, Timo?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Thanks, Martin. So we were kind of like looking at this ourselves as well because this is, of course, market data and we take the market data as is. What we see going on here is that we are quite strong on sort of areas where we electrify rail traffic. And that is the part where we are strong in our products. So we think we are taking share. And also that part of the rail market is actually growing, even if the whole market would be a little bit more in decline. So I would say it's similar situation, which we have also in our marine business in many ways where the sort of bulk cargo is not growing, but the specialty vessels have given us support in that business in cruise and other areas. So we are sort of in the right place on that market.

[Operator]

The next question comes from Shane McKenna from Barclays.

[Shane McKenna, Research Analyst]

Sorry about that earlier. Obviously, we're not paying our phone bills here on time. If we go back to Electrification, I just wanted to get bit of an update on the GEIS $200 million cost-saving plan by 2022. What did we see in '19? And can you give a bit of clarification that we're on track to hit the $120 million in 2020?And then a follow-up on solar inverter. Again, timing-wise, are we still looking at an exit of that business in Q1 and guiding towards a slightly more than 50 basis point margin impact on Electrification? I'll stick with those 2.

[Peter Robert Voser, CEO & Chairman]

Yes, that's -- thanks, Shane. On the second one, I think the answer is yes to what you have said. So Q1 and the guiding numbers are also correct. And I think I'll give number one to Timo.

[Timo J. Ihamuotila, Executive VP & CFO]

Yes, on the GEIS, we have made good progress and maybe a good way to look at that is that some of these early savings are coming pretty much sort of 1:1 ratio on the cost. In 2019, we spent $98 million, as we say, on the restructuring on this area. And that gives a good indication. We are saying that we expect about $100 million going into 2020, and then it starts to taper off after that. So in that sense, we are in line -- actually, we are, timing-wise, slightly ahead of the cost synergy equation in the GEIS implementation.

[Shane McKenna, Research Analyst]

Perfect. If I'm allowed, just one follow-up. Just on trade payables, obviously, we had the new system that was put in place during '19 that dragged mostly on Q2 and Q3. What can we expect as we go into 2020, just from the trade payables? And could you quantify, sorry, the impact of that in 2019?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes, yes, more than happy to. I mean this was a big implementation for us on synchronizing the payment system in the whole company. So we're actually quite proud of that achievement, even if it had a negative impact on the net working capital and cash flow in that regard. The total impact for 2019 was about $300 million negative. And now we have a way better toolbox to then work that forward going into 2020. So if there are 2 areas where we look to work on net working capital, it is exactly now benefiting from this new payable system going into 2020. And then also, when we look at our receivables and particularly, the overdue situation, we have also opportunity to improve in the overdue.

[Operator]

The next question comes from Alessandro Foletti from Octavian.

[Alessandro Foletti, Financial Analyst]

I have 2 brief questions. One, if you already have some idea on the share buyback, the way you will structure it, whether it's going to be through a put option system or a buyback on a second line or any other ideas? And then on the GEIS integration, I would like to know if you can give an indication of how far are you with the rollout and the production of the ABB products into the -- went into the channels of GEIS and also really substituting the product portfolio of GE.

[Peter Robert Voser, CEO & Chairman]

Thanks, Alessandro. I'll take number one, and then you take the second one, Timo. On the first one, we have committed to the share buyback. We have said that we will do it in a responsible and fast way, the fastest we can think of, and also -- but it has to be responsible as well. So you have to take into account market circumstances at the time when you start these things, that's too early for me. We are kind of, as we said now, planning for end Q2. So therefore, we will watch this, and all options are on the table, and we'll then decide to take which element which we -- or which way we want to go. You mentioned, I think, 2 of them. So the Board is clearly analyzing that and will then make up their mind and take a decision when we are actually closing the deal. So the commitment is to start and return the net proceeds on a 100% basis as speedy and as responsible as possible.

[Timo J. Ihamuotila, Executive VP & CFO]

Okay. Thanks, Alessandro. And then on the GEIS, so the early impact from the integration benefit is coming from the areas like general and admin, and we are now also seeing some impact from consolidated manufacturing footprint. But really, the new product introductions are only coming. And in that sense, you can say that the cost synergies, which we said that the deal equation is built on, are coming on as planned. And then when we get the new products out, which is just starting. I mean I have to remind that this is a 4.5-year program for us overall. So we are now starting to get the new products out, and that is then now happening during the coming 2 years, 2.5 years. So that's how we look at it.

[Operator]

The next question comes from Ben Uglow from Morgan Stanley.

[Benedict Ernest Uglow]

I had just really a bit more color, Peter, on China. You gave some helpful commentary about a pickup. But if we look at the -- if we strip out the robotics orders, I'm assuming that the growth in orders was close to double digits in the quarter. Can you give us a sense across the different businesses, between low voltage process, motors, drives, et cetera, is there any particular area that's driving that strength? What do you see changing on the ground? And I guess, in your opening remarks or maybe it was Timo, but I think somebody mentioned the buildings was less good. So I really wanted to understand that trajectory.

[Peter Robert Voser, CEO & Chairman]

Yes. Okay. I think we shared this one as well. So I start with the more overview. As we said, from the 4 businesses, clearly, RA was down for Robotics & Discrete. The other 3 had all double digit. I would say it's in the 10% to 20%, double digit. And all of them were actually growing. And then if you go further into the details, I think that's where I look to Timo to go -- to give you some color on those?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. Yes. So we are -- if we first look at Electrification, we actually had a broad-based strong performance. And when we talk about buildings having been slightly negative, we are not more talking about the sort of residential buildings area. So there is activity picking up and the overall sort of industrial demand seems to be picking up because we have both in drives and motors, quite good demand for larger installations, and the same thing is happening in Electrification. So those go a little bit in hand-in-hand. And then regarding Industrial Automation, it was more in sort of marine and port areas, so there we had bit of a sort of larger order type of demand.

[Jessica Mitchell, Head of Investor Relations]

Okay. Thank you. We are already running overtime for the call so we'll take one last question, and then, of course, IR would be delighted to follow up with anybody that still has questions not answered. Thank you.

[Operator]

The next question comes from Andre Kukhnin from Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

I'll be quick. Firstly, on data centers, I wanted to clarify whether that double-digit 5-year straight growth was comment on the market or ABB specifically. And I can see on the outlook, it's in the above 3% growth, but do you think that double digit is sustainable in terms of outlook. And the second question on robotics. You mentioned new opportunities in logistics and service. Obviously, I don't want to steal your thunder from the Capital Markets Day, but is there an offering there at the moment? Are you active in that space?

[Timo J. Ihamuotila, Executive VP & CFO]

Yes. So first of all, on the data center. So this has been -- of course, a big part of this has been driven by the market, but we have also improved our offer, and we are definitely, in our opinion, growing at least with the market, on the data centers. And then going forward. Of course, when growth is above 10% and the market gets bigger, it is always slightly more difficult to hold it up. So let's see how that goes.

[Peter Robert Voser, CEO & Chairman]

On the robotics side, indeed, I think the Investor Day will give you more insight there on what we are doing. Let me just take one thing from a more strategic point of view. What we are now seeing clearly is actually we're taking advantage of having B&R. So the Discrete side and the Robotics together and we are offering very unique solutions to our customers by combining the 2, we showed some of that at the robotics and discrete automation shows, either robotics in Tokyo, but also in Nuremberg just a few weeks ago. So we are coming to the market with very, very advanced solutions. You will get a glimpse of that when you -- if you have time to attend the robotics Investor Day there. So I think that's really where we now see the strategic emphasis, which we can give to the 2 businesses and run them together under 1 leadership. And we see the whole benefit now coming. So this is very promising for us in the longer term.

[Jessica Mitchell, Head of Investor Relations]

So thank you very much. And with that, we'll need to close the call, and we look forward to any follow-ups over the next few days. Thank you.

[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.