Abb Ltd

SIX:ABBN

Earnings Call Analysis

ABB Reports Record Year, Optimistic Outlook

ABB has celebrated a record year in 2023, delivering unparalleled cash flow and return on capital employed, emblematic of a robust market and an efficient business strategy. Throughout the year, a 3% improvement in orders and a book-to-bill ratio of 1.05 signaled positive momentum, particularly in long-cycle businesses which compensated for short-cycle weaknesses. Moreover, the company's focus on the ABB Way operating model enhanced operational efficiency, taking the large motor business margins to double digits. A dividend of CHF 0.87 is proposed, reflecting confidence in the operating model and ABB's market stance, with share buybacks planned to continue. The fourth quarter remained stable despite short-cycle business challenges, and an uptick in Q1 orders is anticipated. The quarter saw a 16% increase in operational EBITA, raising the margin to 16.3%. Revenue growth rate and operational EBITA margin for the next quarter are expected to be consistent with Q4's performance, with slight improvements.

ABB Achieves Record Year Driven by Market Position and Operational Efficiency

ABB has closed 2023 with remarkable success, achieving a record year in performance. This is evidenced by a series of improvements across the Profit & Loss (P&L) statements, the generation of high cash flow, and an increased return on capital employed. The company attributes part of this success to the robustness of the long-cycle business which helped to compensate for weaknesses in the short-cycle sectors. Additionally, the company's focus on efficiency and agility—exemplified by the ABB Way operating model—contributed to this outcome. With confidence in their market position and future prospects, ABB has upped their financial and sustainability targets, showing a commitment to a net-zero emissions future and anticipating higher growth and returns.

Stable Orders and Dividend Increase Reflect Company Resilience

Despite varied market environments, ABB managed to keep orders stable, with some areas experiencing growth which sustained the business amidst challenges in others. To share its success with shareholders, the Board has suggested a dividend increase, signaling confidence in the robustness of ABB's business model and future outlook. Share buybacks are also on the horizon as a method to return excess cash to shareholders, demonstrating the company's proactive approach to shareholder value.

Mixed Market Developments with Geographical Variations

ABB witnessed demand resilience with increased orders in three out of four business areas. However, the global landscape was not uniform. The softer areas included residential constructions in China and the U.S., and Discrete Automation across several regions. Geographically, the Americas showcased robust markets, with Europe experiencing a decline influenced by Discrete Automation. Overall, ABB managed to sustain a strong order backlog of $21.6 billion despite these variations.

Earnings and Margin Growth Underscore Solid Q4 Performance

The fourth quarter of 2023 highlighted ABB's capabilities with earnings and margins faring well. The increase in operational EBITA by 16% and margin expansion showcase the effectiveness of ABB's pricing and volume strategies, which compensated for rising labor costs and ensured sustained profitability. This culminated in a quarter that solidified the company's strong performance over the year.

Business Area Highlights and Prospects

Electrification sustained its high margin level, and with operational EBITA margins improving significantly, the division appears set for continued positive performance. Conversely, the Robotics & Discrete Automation business faced declines in orders, though margins held steady through effective cost control and a favorable mix. For Motion, despite a drop in operational EBITA margin due to product quality costs, there were order increases, signaling potential for recovery.

Process Automation and Robotics & Discrete Face Margin Pressures Moving Forward

Looking ahead, Process Automation is expected to maintain its margin levels owing to strong market positioning and performance but is not projected to climb higher at the moment. Robotics & Discrete Automation is expected to encounter margin pressure due to decreased volumes, although efforts are being made to align the organization with market demand.

Outlook for 2024: Moderate Growth, Margin Stability, and Efficiency Focus

For 2024, ABB foresees around 5% top-line growth with business areas like Electrification and Process Automation poised to outperform. Gross margin improvements are anticipated due to a higher margin order backlog and expected control over costs, other than labor inflation. ABB's strategic emphasis is on gross margin productivity, becoming more critical in an environment where pricing power might be lower than in previous periods.

Earnings Call Transcript 2023-Q4

[Ann-Sofie Nordh, executive]

Greetings to you all, and nice to connect again as I welcome you to this presentation where we will talk through the results for ABB's fourth quarter. I'm Ann-Sofie Nordh, Head of Investor Relations. And next to me here is our CEO, Bjorn Rosengren; and our CFO, Timo Ihamuotila. They will take you through the presentation before we open up for questions.

But before we begin, I should mention the information regarding safe harbor notices and our use of non-GAAP measures on Slide 2 of the presentation. This call includes forward-looking statements based on the company's current expectations and assumptions, which are subject to risks and uncertainties.

And with that said, we kick off the presentation, and I hand over to you, Bjorn.

[Björn Klas Rosengren, executive]

Thank you, Ann-Sofie, and a warm welcome from me as well. I want to start with some quick reflections on 2023, and I'm proud to say that it was a record year for ABB.

Some proof points of our success includes that we improved on all lines in the P&L and, in many cases, to new all-time high levels. We delivered record high cash flow and return on capital employed, a great team effort.

So how did we do this? First, it was a solid overall market environment. We have a good business mix. And this year, we saw a strong momentum in the long-cycle business, which more than offset the weakness in part of the short-cycle offerings. In total, our comparable orders improved by 3%, and our book-to-bill ratio was 1.05.

Secondly, we are more efficient and agile company. We took actions to further push the ABB Way operating model within some divisions, and one success story is that the turnaround in the large motor business. They have done a great job and improved in many ways, including how they work with value-based pricing. It was really good to see that they took the margin to a double-digit territory.

But I do not look at 2023 as something extraordinary. What do I mean with that? Our business is to help the world accelerate the energy transition towards electrification. We also help customers to become more efficient and safe through our automated and digital manufacturing.

ABB has a leading position in markets driven by strong secular trends. And we are confident about the future, which is why we raised our long-term financial and sustainability targets at the CMD in November. In short, we target higher growth and higher returns, while enabling a world with net 0 emissions.

Finally, on 2023, the Board proposes a dividend of CHF 0.87. The increase of CHF 0.03 from last year is more than the usual annual increase of CHF 0.02. This is based on the strength of the ABB Way operating model and the future-proof market position. We also expect to continue to utilize share buybacks as a way to return excess cash to shareholders.

Now let's turn to Page 4 for some more detailed comments on the fourth quarter. My key takeaway from Q4 are that comparable orders remained stable from last year, meaning total demand is holding up, despite weakness in the short-cycle business. Book-to-bill was below 1, but I'm not so worried about that. It is a normal pattern in the fourth quarter. I expect a stronger outcome already in Q1.

Secondly, we improved operational performance and delivered record cash of $1.9 billion, up by $1.2 billion from last year, and even stronger than expected. And we improved return on capital employed by 460 basis points to 21.1%, a strong outcome in my view.

Lastly, I'm pleased to see the division utilizing our strong balance sheet. We have recently signed 7 small bolt-on acquisition. Most of these deals add more embedded software and AI capabilities to our offerings. This will support our market position long term.

In summary, we delivered in line with our guidance, and I'm pleased with the solid finish of the year.

Now let's turn to Page 5 for some more detailed comments on the market development. As I mentioned earlier, demand was resilient, and comparable orders increased in 3 out of 4 business areas. We saw a stable to positive development in most customer segments, with the softer areas to mention being residential constructions, where we see weakness in both China and U.S., while Europe seems to be stabilizing at the low level.

The other areas was Discrete Automation, where we saw similar pattern as in recent quarters. Timo will talk more about the details on the slides on the Robotics & Discrete Automation. We expect the challenge in RA to persist also in Q1. However, we believe the fourth quarter was a low point for absolute orders.

In total, for ABB, orders remained stable year-over-year, and the order backlog remained strong at $21.6 billion.

Now let's turn to Slide 6 and look at the market pattern from a geographical perspective. Comparable orders increased in 2 out of 3 regions. The Americas is still where the underlying market is most robust, with a continued solid customer activity in the U.S. EMEA grew by 2%, and we see a strong development in, for example, India. But China is a challenge. With the softer activity in several segments, Europe declined by 5%, mainly impacted by the weakness in Discrete Automation.

Now let's turn to Slide 7, our earnings outcome. In the chart, you see the strong improvement in both earnings and margin. Operational EBITA was up by 16%, and margin increased by 150 basis points to 16.3%. This was supported by good price development and higher volumes, which clearly offset the labor cost inflation.

I am pleased about the outcome. This was the fourth consecutive quarter where gross margin was about 35%, a strong improvement compared to historic levels. In total, the fourth quarter was a solid end of the year.

With that, I will hand over to Timo.

[Timo Ihamuotila, executive]

Thank you, Bjorn, and greetings to everyone from my side as well.

As usual, let's start with Electrification on Slide 8. The market pattern remained very similar to the previous quarter. Comparable orders improved by 2% from last year, so a continued resilient demand where the project and systems relating offerings was robust. And the short-cycle business actually stabilized after some weak quarters.

In terms of market segments, as a total, it was only residential construction which declined overall, weighted down by weakness in both the U.S. and China. However, on a positive note, we saw some signs of stabilization for residential demand in Europe, including Germany, albeit at a low level.

The other area to mention is China. Not all is bad, like continuing strong demand for data centers, but several other large segments declined, including both construction and utilities.

Turning now to revenues. The Electrification team, again, did a great job executing during the quarter, resulting in 8% comparable growth. Higher volumes was the main driver with good additional support from price execution. It's really nice to see Electrification holding on to their established higher margin level.

At 19.7%, the operational EBITA margin improved by 310 basis points from last year with a fairly even support from volume and price. This more than offset the higher labor costs as well as higher investments in R&D and SG&A expenses. All in all, another strong quarter for Electrification.

Looking ahead into the first quarter, we currently expect the growth rate in comparable revenues to be similar to what we saw in Q4 and the operational EBITA margin to be slightly up sequentially.

Let's then move to Slide 9 and the Motion business area. Thanks to the continued good momentum in the long-cycle businesses, with some large orders booked mainly in the traction division, comparable orders increased by as much as 13%, admittedly from a relatively low level last year.

From a segment view, this meant that customer activity was high in the process-related areas of oil and gas, chemicals and mining as well as for food and beverage and rail. A weak construction market weighted on demand for the HVAC side.

Revenues were up by 2%, again surpassing the $1.9 billion level. The impact from higher pricing and volumes in the Drives divisions more than offset the slightly softer volumes in the motor divisions. While the gross margin was slightly up from last year, Motion's operational EBITA margin came in at 16.6%, decreasing by 80 basis points.

The main reason to the drop was some product quality costs with a negative impact of about 60 basis points year-on-year. This was limited to this period and should not be a topic in the coming quarters.

Looking ahead into the first quarter, we anticipate a low single-digit growth year-on-year in comparable revenues and operational EBITA margin to decline somewhat from last year due to a changing mix with a higher share of long-cycle deliveries.

Turning to Slide 10 and Process Automation, where comparable orders increased by 5% year-on-year. This includes a large order booking of about $150 million, which will be delivered over a number of years. From a segment view, the marine and ports demand was strong, but we also saw good momentum in low-carbon related areas such as LNG, hydrogen and carbon capture.

The product business noted some slowing momentum after a period of really strong growth. Comparable revenues were up by 10%, with strong growth in all divisions. This was driven mainly by volumes, but also some positive pricing coming through.

It was another good margin quarter for Process Automation. They delivered an operational EBITA margin of 14%, improving 80 basis points year-on-year and with all divisions at double-digit margin levels. Most divisions contributed to the underlying improvement on the back of better project execution and delivering higher volumes from the backlog with improved gross margin.

Looking at our expectations for the first quarter, we foresee a mid-single-digit growth rate for comparable revenues and the operational EBITA margin to be slightly up from the Q4 level.

On Slide 11, we turn to Robotics & Discrete Automation, where comparable orders declined sharply by 33% from last year. The market pattern is similar to the previous quarters, meaning in Machine Automation, customers are holding back on placing new orders as our delivery lead times are reducing back to the shorter normal time span.

In Robotics, demand declined across the board. 3C Electronics was the key weak segment. And although automotive orders softened somewhat year-on-year, this is more linked to timing of some large orders, rather than a real change in the market.

RA orders are challenged right now, but we expect, as Bjorn said, the fourth quarter to have been the trough quarter for absolute order intake. We anticipate order normalization to level off during the first half of the year.

Moving to revenues, which decreased by 7% on a comparable basis. The Machine Automation division had strong revenue growth as they execute on the order backlog. However, this was more than offset by the missing book and bill volume in the Robotics division.

It was good to see that RA margin held up well at 13.8% and keeping largely stable, despite the drop in revenues and added pressure from labor inflation. This was achieved through improved mix with higher volumes in Machine Automation as well as by stringent cost control. For the first quarter, we expect a mid-single-digit negative growth in comparable revenues and some sequential pressure on the operational EBITA margin due to mix impact.

Then moving on to Slide 12, showing the group operational EBITA bridge. The profile is very similar to the last couple of quarters, with the earnings improvement driven by strong operational performance. The impact from our positive price execution at about 2% and leverage on higher volumes more than offset the adverse effects from cost inflation related mainly to labor. All in all, a 16% improvement in operational EBITA with 150 basis points margin increase.

Let's now move on to cash flow on Slide 13. Now this is a really nice picture. You may remember, we set a target for ourselves to deliver a free cash flow of $3 billion this year. We did even better with total free cash flow of $3.7 billion. All business areas contributed with improved operational cash flow, and the fourth quarter was a really strong finish to the year.

It was good to see that our focused efforts paid off, as net working capital was reduced sequentially and the ratio to revenues was at 10.2%, down from 12.8% at the end of Q3. We lowered inventory levels and reduced receivables, despite the strong revenue growth. We also had some additional support from customer advances, a great job done by the ABB team. And we expect a good cash delivery also in 2024, supported by operational earnings and continued focus on net working capital.

Then taking a look at our return on capital employed development. You see in the chart that we clearly beat our target of about 18% as we reached an all-time high level of 21.1%. A strong return on capital improvement of 460 basis points was driven mainly by better operational performance. As you can see, last year's capital employed calculation included the negative impact from the 19.9% ownership in Hitachi Energy. However, even excluding this, the improvement was still an impressive 330 basis points.

Overall, the improved return on capital employed is a good indicator that we are really improving ABB's long-term performance and operating at a best-in-class level.

And with that, I will hand off to Bjorn to round off this presentation.

[Björn Klas Rosengren, executive]

Thank you, Timo, for the insight.

Let's finish off with Slide 15 and some outlook comments, as I know this is a focused area. In the full year 2024, we expect a positive book-to-bill. We anticipate a comparable revenue growth of about 5% and the operational EBITA margin to slightly improve from the 2023 level of 16.9%. For the first quarter, we anticipate comparable revenues to grow at low to mid-single-digit rate and the operational EBITA margin to remain stable or slightly improved year-over-year.

With that said, let's open up for questions.

[Ann-Sofie Nordh, executive]

Yes. Let's do so. [Operator Instructions] And with that said, let's open up for the first question. We'll take one for -- from the phone lines, and we open up for Andy at JPMorgan, please. Your line should be open.

[Andrew Wilson, analyst]

It's actually around the comments on the buyback, Bjorn. I guess, just trying to get a better understanding kind of the various factors that sort of playing into the thinking on not explicitly announcing anything instead, but I guess making comments sort of intimating towards that given obviously what was a fantastic Q4 cash performance and the balance sheet, obviously, in very good shape. Is this something mechanical in terms of when you would announce it? Or is there more to it for us to think about?

[Björn Klas Rosengren, executive]

Andy, I will excuse you for this time because you haven't been following us too long. But the one of you who has been following us knows that this is actually an AGM question, so that has to be decided on the AGM. And after that, it's normally when we announce it. So that is absolutely the reason. But we indicated, of course, that we will continue to use the buyback as a tool to return cash. I hope that's okay.

[Ann-Sofie Nordh, executive]

And we'll take the next question from Max at Morgan Stanley.

[Max Yates, analyst]

I just wanted to ask about your confidence on the positive book-to-bill for 2024 because, I guess, if I look at the sort of cadence of your orders as you've gone through this year, we started at a kind of $9 billion plus. We're exiting the year -- sorry, we started at $9 billion plus. We're exiting the year at sort of $7.6 billion. So obviously, kind of if we take the second half run rates, we're running kind of below, I guess, a positive book-to-bill.

So I guess, my question is, from where we stand today at sort of the $7.5 billion to $8 billion level, which of those divisions do you really expect to kind of sharply improve, I guess, and excluding Robotics & Discrete Automation because, obviously, that is one of the smaller divisions? But just where do you really see the kind of sequential improvements as we go through the year to secure that positive book-to-bill?

[Björn Klas Rosengren, executive]

Yes. Of course, all our numbers is built up from our divisions and consolidated up to be the expectations. But yes, we think that we are well positioned on many of these larger transformational deals that are -- that we expect that will come in during this year also.

And during the second part of the year, we expect the short-cycle business also to improve. So this is, of course, an early time of the year to announce that, but these are the best indication that we have from our businesses.

And I think when you come to the robot and from the order perspective on the Robot & Discrete Automation, we believe that the fourth quarter that we've seen is the bottom out of that business, and we should see an improvement in this success coming during the year and especially on the second part of the year. That's in our plan.

[Ann-Sofie Nordh, executive]

Okay. Thank you. And we'll continue on the topic of sort of orders book-to-bill with a question here from the online tool. It comes from Mattias Holmberg. And it says, given the guidance of book-to-bill of more than 1 in 2024, should we view the elevated length of the backlog as a new normal? Or do you expect at some point to work down the backlog? Maybe for you, Timo.

[Timo Ihamuotila, executive]

Yes, maybe. Yes. So first of all, on this backlog length, so it's fair to say that our orders are a little bit longer at the moment, but you really have to look at this now business area by business area. So if you look at, for example, Electrification, there, we have a backlog up quite a bit, maybe just round numbers, sort of $500 million type of number. That pretty much is going to convert all during the year.

And also in PEA, clearly, we are up a lot. We will get support from the backlog on growth. In Motion, we have bit longer at the moment, but we will still get support for growth. And then RA is, of course, quite a different story, where the backlog is down quite a bit. So you really have to look at these backlog dynamics at the moment business area by business area.

But of course, as Bjorn said, we are also expecting improvement in the shorter-cycle business. Just to remind everybody that during '23, I think our shorter-cycle orders went down close to 10%. So we're, of course, coming from a bit of a different level there.

[Ann-Sofie Nordh, executive]

Okay. And then we go back to the phone lines and open up for Daniela. You with us there, Daniela?

[Daniela Costa, analyst]

So I'll move from volumes into pricing. Can you comment a little bit on the outlook that you're seeing now that things seem to be normalizing across all the value chains and maybe in particular focus on what you're seeing in China, where we hear lots of comments about deflation in other areas of the economy?

[Björn Klas Rosengren, executive]

Yes. This year, you saw about 2% price increase compared to last. And I think moving into next year, it is more really around 1%-ish that we are expecting.

China, I think we should not expect too much when it comes to price increases. That would be the challenging part. So the price increase will probably come from the other parts, North America and in somewhat also Europe.

[Ann-Sofie Nordh, executive]

Thank you, and we'll continue. I'll tie on to that on the topic of China. We have a couple of questions here coming through on the online channel, and I'll bundle them into one here. And I think for you, Bjorn, can you give some more color on China, specifically Discrete Automation? Or basically, what do you expect for China in 2024?

[Björn Klas Rosengren, executive]

Yes. I actually recently was also spending some time in China with our operations. And it's quite clear that it's the Robotic & Discrete Automation, who has the biggest headwind, and that has also been during the last 3 quarters if you look at it from that perspective.

Yes. It's difficult to say China for what's going to happen. And normally, a good indication from China you get after the new year, Chinese New Year. Then it sets the standard for the year. So we still have to wait a little bit, a couple of weeks before we get the feeling of why it will come.

China is a little bit of a mixed bag. We see better development in the Motion part as well as in the Electrification. Also on the Process Automation, there are some good stuff. So it varies a little bit between the business. Clearly, it's Discrete Automation & Robotics who has the most headwind.

You want to add something?

[Timo Ihamuotila, executive]

Yes. No, I was just going to add to this that we said today in the whole RA orders that we expect this $550 million to be at the low point. So already for Q1, we expect higher orders in RA.

[Ann-Sofie Nordh, executive]

Okay. And then we go to the phone lines again and open up for Gael at Deutsche Bank.

[Gael de-Bray, analyst]

Could you provide perhaps a little bit more color on the growth and margin guidance for 2024? Which business areas do you see contributing the most the growth and the margin targets this year? And specifically, are you still confident that Process Automation and Robotics & Discrete will deliver margins of at least 15%?

[Björn Klas Rosengren, executive]

Yes. You've probably seen that both of them first, they are around between 14% and 15%, both of those business areas. On the Process Automation, my feeling of that is a well-positioned business that we are really benefiting from the transformation towards a more sustainable future. And this is both when it comes to base industry, tradition based industry that are changing as well as you're seeing some of those new exciting projects.

I think when it comes to Process Automation, they have done an excellent job in getting their performance above what they actually expected is possible. And you should also know that this is without the Turbo. So the performance over 14% or around 14.5% is an excellent performance. Yes, we believe that they have the capacity to stay on this margin. I don't expect them to go much higher at the moment, but around these margins, I expect.

On the Discrete Automation and on Robotics, of course, as the volumes have gone down, they will face some more margin pressure during the year. That is pretty clear. But they are taking the actions in both B&R as well as in Robotics to adjust their organization in line with the demand in the market. And I think they will be doing that in a good way.

[Timo Ihamuotila, executive]

Yes. Maybe if I just comment on the top line part of the question because we said around 5%. So as we go into the year now, our base case would be a little bit like Electrification maybe much higher than that and same for PA on top line and then maybe Motion could be a bit lower, let's see. And then RA has tough time getting there, so a bit lower clearly than the 5%. So that's kind of like how we see the dynamics between the business areas.

[Ann-Sofie Nordh, executive]

Thank you. And then we take the next question from Sebastian at RBC.

[Sebastian Kuenne, analyst]

I had a follow-up on pricing and raw materials and the gross margin. So you mentioned that pricing helps quite a bit on the revenue and margin in Q4. But of course, the orders you take in are on average with an 8% lead time.

I was wondering what you see basically on the current order intake that you have. Do you expect the gross margin to go up from that with all your calculations on raw material and staff costs there? So I would like to have a better idea of the gross margin development here.

[Björn Klas Rosengren, executive]

Yes. The gross margin development is, of course, one of the big success stories during the last years. And if you just see during Q4, we saw a somewhat improvement, a small improvement on the gross margins. So it continues to go up. And the order book has quite a good gross margin in the whole order book. So that's looking quite promising.

It's, of course, difficult to say what the future have to offer. We believe that we are not getting out as much pricing as we did on the previous. On the other hand, there is less pressure on inflation from suppliers because the world is actually normalizing in a way that we had before.

So the businesses will continue to drive efficiency. And for us, it's important that the businesses have what we say gross margin productivity, that is the gross margin per employee over 5%. That is the target for each of the business, and that's also what we expect them to deliver. And you can do that, of course, either to grow your pricing or you need to keep your cost under control.

[Timo Ihamuotila, executive]

Yes, yes. If I just throw a couple of numbers in there. So as Bjorn said, we have a much higher backlog gross margin going into '24 than we had going into '23. So that's a good thing on the gross margin side. And then we have also a situation where there is not much -- as we expect again going into a year, not much other inflation than labor inflation in the gross margin, and that we should be able to sort of cover with the 1% price, what Bjorn mentioned.

And then of course, with growth, we should get some leverage on the gross margin side as well. So it looks like an okay picture going into the year with the gross margin as well.

[Ann-Sofie Nordh, executive]

Thanks. We move to Andre. Your line should be open now.

[Andre Kukhnin, analyst]

I wanted to dig into the trends in medium voltage part of your business in a bit more detail and particularly the Electrification part. Could you talk about maybe at what pace this is growing now and how pricing has developed in that business within the 2% that you delivered overall?

And also are you planning to ramp up capacity in this space given the growth or we're still at the stage where capacity is still ample and you can just benefit from leveraging that?

[Björn Klas Rosengren, executive]

Thank you for the question. Yes, I'd be happy to talk about the medium voltage. And I think this is both in Electrification as well as medium voltage drives, which has had a tremendous development. And DES, which is the medium voltage business, have had a great development, both when it comes to orders and growth. But these are, of course, a little bit longer term, so we should see in the years coming closer.

But mainly, the gross margin in this business and the profitability of this business has now come up to where actually should be in both of these businesses. And this is actually compensating some of the somewhat weaker low-voltage business that you're seeing, for instance, in low-voltage drives.

So that has had a good development, and it is as much as 25% of our portfolio today or our invoicing is actually medium voltage, and that is developing in a good way.

Anything you'd like to add there, Timo?

[Timo Ihamuotila, executive]

No. I actually -- I have to admit, I didn't check that number now going into this call this time because we have earlier spoken about this number. So I don't have it on top of my head. But if you look at some of these areas where we had order growth, like Bjorn mentioned, system drives or traction and so forth, so it is definitely continuing the trend in those areas.

[Björn Klas Rosengren, executive]

Yes. This is really the strongest part of our business at the moment. .

[Andre Kukhnin, analyst]

And if I may, just are we in double-digit growth kind of territory there? And then just on capacity, if I may?

[Björn Klas Rosengren, executive]

You mean on the investment? Yes, sure, sure. Yes, this is -- yes, we are investing in capacity, especially in North America. That is -- and that's also why we expect a little bit more CapEx during the year that we saw last year. That is related to building some factories in -- and that is -- it's a combination of the medium voltage going up, but also to becoming more self-sufficient in the North American market. So yes, there will be some capacity building out.

[Ann-Sofie Nordh, executive]

Thank you. And then we open up the line for Alex Virgo, please. Alex, are you there?

[Alexander Virgo, analyst]

Yes. I wondered if you could just dig a little bit more into the details for us in short-cycle trends. And Timo, maybe could you give us the differences between Robotics and Machine Automation? Just as we're trying to think about building on Max's question earlier on around the sort of the book and bill and thinking about how you see that sort of trajectory of recovery, I appreciate your comment on orders in Robotics normalizing in the first half.

I'm just trying to get a sense of this sort of stabilization in short cycle that you're talking about and where that's coming from given also your comments on the short cycle in EL as well. So in EL and RA short cycle, could you sort of split that out for us a little bit more, please?

[Björn Klas Rosengren, executive]

Yes. Maybe I'll just start up a little bit with the Robotic business. So when you see orders down 33%, this varies between the Discrete Automation, Robotics. The Robotics is down about 16%, and rest of it is actually on the Discrete Automation.

It looks a little bit different also in the order book in the 2 different businesses. We are quite -- we have a smaller order book in Robotics today than we have in Discrete Automation. And you probably remember when -- during that time where we had difficult with the supply chain issues, we had quite a big building up of order book in the Discrete Automation, where we believe it should be sufficient for at least 2 more quarters on that side. But Robotics is more depending on getting short-cycle business in during this period.

[Timo Ihamuotila, executive]

Yes. Maybe I'll just say proportionately smaller because it's, of course, smaller business as well. But Bjorn is absolutely right. So if you look at before this whole supply hassle in Machine Automation, the order book was maybe sort of 200, 300. We are still somewhere like 700.

So we have, I don't know, a couple of quarters still to execute from the order book. And then we will need to see in Machine Automation also improvement in short cycle, whereas in Robotics, we are expecting that to start to happen already earlier, as we said.

[Alexander Virgo, analyst]

Okay. Great. And on the EL as well, could you just comment on the short cycle? You mentioned low voltage in the answer to the last question.

[Björn Klas Rosengren, executive]

Yes. A little bit short on that. On the Electrification, it's a little bit different. I think it has a more solid order book write over. So on the low voltage, of course, a lot on the breaker business, so we call it Smart Power, it continued to be very, very strong in our book.

Where we've seen some headwind for quite some long time is in the smart building part of it, and it's very much related to the German market. But they have taken the measures to adjust the organization. And you see in some of those restructuring costs taken during the fourth quarter actually related to that.

But it's quite clear also that the DS, the medium voltage part of the package is where you're seeing the best improvement during the year, both when it comes to orders in as well as financial performance.

[Timo Ihamuotila, executive]

Yes, exactly. And as I said earlier, about $500 million higher order book in EL, that's in our papers, which we put out today. And if you look at it, whatever, $15 billion business, so that will give you a couple of points, at least, coming from the order book. And then the rest will need to come from book-and-bill, i.e. on the short cycle.

[Ann-Sofie Nordh, executive]

Thanks, Alex. And then we open up for Dan Cunliffe.

[Daniel John Cunliffe, analyst]

Question on cash flow. I saw really where net working capital is going. It moved nicely 12.8 to 10.2. Do you think it could go below 10 or if this further sort of inventory improvements here?

And then if you maintain the margins as you'd guide a slight uptick, do you think we could see a repeat of this very strong sort of $4-plus billion operating cash flow going forward and whether that's a sustainable high level? And then, obviously, with that sort of step-up, any comments on capital allocation, M&A would be great.

[Björn Klas Rosengren, executive]

Yes. I can take the first, and then the capital allocation, I give over to Timo. So when we look at the cash flow, and of course, we are very happy to see now the inventory levels going down. So it's a combination of margin improvement as well as inventory going down, yes. And the cash flow was, of course, very strong, stronger than we have anticipated.

We believe that the inventory should go down under 10, yes, that should be the journey. And we'll see how long time it takes to get there. But I can assure you, part of the incentive program during next year is to continue to drive down the net working capital, and that will automatically generate.

I think we have a good potential to deliver good cash flow next year. If it's going to be as high as $3.7 billion, I cannot say. But I think, definitely, we should be over $3 billion. That is my feeling. Maybe you would add into that.

[Timo Ihamuotila, executive]

Yes. Well, if you kind of like -- let's call this sort of a base case type of thinking or so. If we would grow this 5% and do it with this margin, we will have some cash coming from operating performance improvement, say, $250 million, $300 million. Then that -- at the same net working capital, the revenue, that growth would tie maybe $150 million, a bit more CapEx, bigger tax cash flow, but we could be even on sort of $3.5 billion type of areas. And then if we can release more, as Bjorn was sort of alluding to, let's see how it goes, how long it will take, then it could be even a bit better, yes.

[Ann-Sofie Nordh, executive]

Thanks, Dan. And then we have Joe Giordano in line here. Your line should be open.

[Joseph Giordano, analyst]

Just curious on PA. Can you give us some color on that large order? And then also, there was an article the other day about Saudi Arabia kind of directing Aramco to pause expansion plan. So I'm just curious if you're seeing -- when you think about forward orders for stuff like that in oil and gas in that region, do you expect a slowdown at all in any of that?

[Björn Klas Rosengren, executive]

Thank you for the question. Yes, the Middle East have been quite good for us also, of course, driven also by PA projects in that part. You saw -- we actually see the Asia and Middle East doing the same part. So the weak China was actually compensated good by both strong India, but also strong in the Middle East.

And yes, Aramco is an important player there. But it's not only in the oil and gas project. It's actually in a lot of renewable projects also where we've been benefiting. They're setting up the world's largest hydrogen plant where we actually got one of our biggest order a number of quarters back.

So yes, it's quite a lot of activities. And we believe that there should be a mix from both transition in the energy security regarding to LNG investments at the same time that many of these companies will continue to invest in transformational projects, so -- and I think we also saw the COP meeting now down in the region there. Of course, also triggers a lot of activities.

And historically, ABB has a pretty good position there, and we should benefit from that area. So PA is exciting. Of course, it's very much a large order in this, but it also has a very strong service organization, which is about 50% of that part. Do you want to add?

[Timo Ihamuotila, executive]

No. That actually, I forgot to mention this when we were talking about the drivers for '24 that we actually had a very strong service orders during Q4. Actually, in all BEAs, the service orders were growing, so that's also a bit of a positive going into '24.

[Björn Klas Rosengren, executive]

I hope that answers your question, Joe.

[Joseph Giordano, analyst]

Is it on that large order there? Yes. Just curious, any detail on the $150 million on that big order you had there?

[Björn Klas Rosengren, executive]

Is that one maybe...

[Timo Ihamuotila, executive]

$150 million, the large order, which we mentioned separately.

[Björn Klas Rosengren, executive]

Yes, yes. I think this is related to Marine. And there, it's good to see that the cruising industry is on -- building there is booming enormously. And as you know, we have a very strong position there with our asset ports and electrification of the port. And we're benefiting quite well of that, yes.

[Ann-Sofie Nordh, executive]

Thank you. Thanks, Joe. And then we move to Will Mackie, please. I think your line should be open now.

[William Mackie, analyst]

Yes. My question relates to risk, political risk. Actually, it's a significant year for elections, particularly in the U.S. and changes in geopolitics. So I guess, the question is how well is ABB positioned to address potential risk from changes in regulation around imports or exports into China or actions such as an across-the-board tax increases for imports into the U.S.?

[Björn Klas Rosengren, executive]

Yes. Thank you for the question, Will. This is, of course, one of the subjects that we have been focusing on for many, many years, but also even more during the last years because of the situation. We have the strategy, local for local, meaning that we try to be as self-sufficient in the different regions as ever possible.

And we are, as you know, in China, 90% to 95% self-sufficient, that means supply, production and deliveries. And we are now investing in North America. It's based on the IRA. But also that we think U.S. will be maybe a risk for you as being more, let's say, challenging to transport into. So we need to be more local there. I think we're going from 85% -- 80%, 85% that we're moving towards 90% self-sufficient. So it's part of it.

It's quite interesting that you asked this because we have got a lot of questions today regarding the Suez Canal and the impact on ABB here. And it's quite interesting that up until today, we have no material impact at all from that challenges down there in logistics, longer delivery times there. So far, our strategy has worked quite well.

But on the geopolitical side, there is, of course, another angle on this is that the more uncertain the future is, it's more hesitant are the individuals and the companies to invest. I think that is probably a bigger impact on us. And that's why we also mentioned it in the report. No one really knows where the world is going at this moment. There is too much -- there's a lot of uncertainties there.

[Ann-Sofie Nordh, executive]

Thanks, Will. And then we open up the line for Jonathan Mounsey.

[Jonathan Mounsey, analyst]

Jonathan from BNP Paribas Exane. Just a couple of questions. First of all, you touched on China on the outlook. The 5% organic sales growth at the group level, within that, does that assume that China contributes to growth next year?

And probably similarly on Germany, where the message on order intake is a bit similar. I think you talked about actually double-digit declines in Q4. Given how weak that intake was, where are we tracking sequentially in Germany? Is it leveling up? And do you think Germany will contribute to that 5% growth in 2024?

[Björn Klas Rosengren, executive]

Yes. Let me start with Germany because you saw in Q3, we had -- we're down 33%. At that time, we also said that this is also because there's a tough comparison. We saw now minus 17%. And that -- our feeling is now that we are bottoming out in Germany. It has not been worse. Rather, maybe we see some small improvement. So let's see what's coming up, but we are a little bit optimistic that there could be some better from really low level.

On China, if you look at the full year, I think, on orders, we are down 12% for the full year, and you saw 7% in the last quarter. I think it will be difficult for China actually to contribute to the revenue growth for next year. We are, of course, a little bit early to say. We think it has good potential to come back. And because we know that the GDP development last year was 5.2%, they expect 4.7% this year, and that should generate some interesting business for us.

China is very focused on technology for the green transformation. Actually, 70% to 80% of all technologies that are needed for this green transformation is developed and produced in China. So I think we should not underestimate China's potential going forward.

[Jonathan Mounsey, analyst]

Do you think they might contribute higher?

[Timo Ihamuotila, executive]

We're not giving sort of -- I'm sorry, we are not giving country-specific guidances on this. So we can't go there because we really run this on the divisional and business area level.

[Ann-Sofie Nordh, executive]

So then we'll move to Sean at HSBC.

[Sean McLoughlin, analyst]

Just I'd like to confirm the comment from the press conference about E-mobility that the IPO is now looking unlikely in 2024. Just wondered whether that's market driven or if there's anything else. And I think more broadly on the portfolio, how are you kind of thinking maybe about the divisions that are not yet in growth mode? Any potential skills and new areas for divestment?

[Björn Klas Rosengren, executive]

Yes. Let me start with E-mobility a little bit. Yes, it's correct. I mentioned that on the media call that I would be surprised if we would make the IPO during this year. I think it's some headwind there in the market. I think the financial market is not so good at this time. But also some headwind in the market, especially in Europe, Germany, for instance, where subsidies has been taken away. And many of the suppliers have seen a drop in the market part.

So yes, we have some work to do in the organization. We have taken in investors, as you all know. And I think we have sufficient capital in the company. And I think that business is well in the ABB home. And I think for the time being, it fits good in there.

And I think we have both resources and knowledge there to make sure that, that business will be on top. And maybe next year, it could be time to do something. But we need to see some improvement in that business before we feel that, that business is ready to go live. What was it, Timo?

[Timo Ihamuotila, executive]

It was a general portfolio question.

[Björn Klas Rosengren, executive]

Yes. First, it's quite clear that the majority of our divisions are today in growth mode, but we also have a number of divisions in profitability mode. We actually just upgraded the last transformational division, which was the large motors and generators, which is a little bit of a success story that I'm very, very happy for. They really managed to get their performance up and is today double-digit profit. And I think they're doing an excellent job.

It's quite interesting also because in this whole green transformation project, large motors and medium voltage drives is an excellent combination for this project, and we had a lot of success lately.

So today, we have no businesses really underperforming. Some of the business could do a little bit better, even though the businesses they are in are maybe a little bit more challenging than some of the other businesses. But we still have a couple of divisions that we expect an improvement during the year.

But overall, I must say, last year is an amazing year for ABB, and I really want to underline that. When we went into the journey 2020, our objective was to -- the company should reach 15% profit margin, and we did 16.9% this year. And it's actually the second year over 15%. So I see...

[Timo Ihamuotila, executive]

Yes. Over 15% EBIT, actually, this year.

[Björn Klas Rosengren, executive]

Yes, actually. That's a good point. It's not only EBITA, also EBIT above 15%.

[Timo Ihamuotila, executive]

That was not the target.

[Björn Klas Rosengren, executive]

But I think many -- and ABB is a sum of 19 divisions. So if the divisions are doing good, ABB is doing good. The central resources in ABB today is minimum and not going to grow in the future. So the future is going to be the businesses. Just a little bit curious. I think for me, this is a very warm feeling to see that ABB is in great shape, even though markets is getting a little bit tougher.

[Ann-Sofie Nordh, executive]

Thanks, Sean. And then we have a couple of follow-ups. Let's see if we can squeeze them both in. But we'll start with Sebastian again at RBC.

[Sebastian Kuenne, analyst]

I have a question on the Red Sea situation. I recall that during COVID, ABB stocked up quite a lot on inventory getting early into the market by raw materials and components, and people complained about it. And then you basically had very little issues with your supply chain, and it really helped you.

And now we have a kind of a comparable situation in the Red Sea. And I was wondering if you are considering also to now again restock on certain components from Asia in anticipation of potential outages.

[Björn Klas Rosengren, executive]

Thank you for the question. And it's correct that we have, of course, looked into it, and we don't have any material effect, negative effects from the region at the moment. If that is related that we have too much inventory, that could be. But I think, for us, it's more important as we are regional self-sufficient.

So when we talk about inventory reduction, we also source majority of the products from the local market. So there is quite limited products and components that are going across the different regions. If we have a little bit more inventory there, it's not the end of the world, I would say. I still think we have a little bit more.

[Sebastian Kuenne, analyst]

You're not stocking up.

[Björn Klas Rosengren, executive]

No, we are not stocking up.

[Sebastian Kuenne, analyst]

You don't want to?

[Björn Klas Rosengren, executive]

No, we don't want to. That is -- it's pretty clear. And you saw during the quarter that, finally, we've seen the inventory going down towards normal levels. We are still not there. There is more potential to come. But we have no objective to build big inventory going forward, absolutely not.

[Ann-Sofie Nordh, executive]

Okay. Thank you. And we'll round off this session with the follow-up question from Andre, please.

[Andre Kukhnin, analyst]

I just wanted to circle back on some of the comments on Robotics & Discrete. Firstly, the message that China is the biggest challenge. Could you comment on how your market share has evolved across the factory automation and the Robotics business?

And secondly, just looking at the comments you made on orders in Q4 that within the overall 33% decline, Robotics was minus 16%. That obviously implies a substantial sort of 6% to 7% drop for the factory automation. Could you just comment on where is this business now maybe versus 2019 or kind of another benchmark?

Because I understand there are some pretty substantial comp effects there. So I just wanted to understand how that's kind of performing versus what we see maybe from other -- just automation businesses across the group.

[Björn Klas Rosengren, executive]

Let me elaborate a little bit on the Robotic market. Yes, the Chinese market, it's a combination of the global players, some of those international large companies, including us there. And I'm sure you've seen some of the reports from our peers that everybody is facing the same challenges. The Chinese market is tough.

There is also, which we have talked about earlier, a number of local players more coming from the lower-end market and been growing better in the Chinese market. So yes, I think there will be more challenge from local players.

On the other hand, our business is very local, I must say. We have the R&D in China. We have the production in China. So they are also adjusting products more suitable for the Chinese market, meaning you're taking some of that more extensive cost out of products.

So that is the focus. But I think it's the overall market that is low, and we do expect that it will come back, where we will -- we and many of our peers will also benefit. When we look at the orders...

[Timo Ihamuotila, executive]

There was a market share question, I think, there as well, on Robotics market share.

[Björn Klas Rosengren, executive]

Yes. I think the market share, if you look at the international players, we feel it's pretty stable. I don't think there is any big changes. It's more related to some of those Chinese competitors coming upwards where we probably lost a little bit of market share.

[Timo Ihamuotila, executive]

Yes. But not towards the traditional players.

[Björn Klas Rosengren, executive]

Not in the high-end market, no.

[Andre Kukhnin, analyst]

And just on that piece on DA, sorry to push, but just why it's quite a substantial decline for the Discrete?

[Björn Klas Rosengren, executive]

Yes, let me talk about that a little bit. Our -- this is machine automation, and these are sold to OEM customers. These are the machine builders. So that follows pretty much.

But you also know that we had huge issues a little bit more than a year ago when it comes to the supply chain, and we build up a big order book to these. So we still have a good order book, bigger order book than we normally have. And I think it's probably sufficient for a couple of quarters. But we, of course, need to see orders during this period to come in, so we have good deliveries also for the second half of the year.

[Ann-Sofie Nordh, executive]

And with that, we're sort of on the hour, so we round off for this time. Thank you very much for joining us, and we'll see you soon again.

[Björn Klas Rosengren, executive]

Bye-bye.

[Timo Ihamuotila, executive]

Thank you.