ABB Ltd (ABBN) Earnings Call Transcript & Summary

Hello, and a very warm welcome to you all. I am Jess Mitchell, ABB's Head of Investor Relations, and I have with me, Bjorn Rosengren, our CEO; and Timo Ihamuotila, our CFO. We hope you are all keeping very well and getting used to this new virtual world. A special thank you for joining this virtual event with us today. As usual, before we begin, I need to draw your attention to our safe harbor notice on Slide 2. During today's presentation, we may make forward-looking statements. These are based on current expectations and certain assumptions and are subject to risk and uncertainties. You will find more information on our website. Just briefly, a few words about our agenda today. We expect the whole event to take a little short of 2 hours. These times, though, are approximate. We will start with the presentation from Björn and Timo, which I expect to last about 45 minutes. We will then show a very brief 2-minute video. This will allow us to set up for our fireside chat. My colleague, John Armstrong, who is Head of Financial Planning and Analysis at ABB, will moderate the fireside chat and we have based this on questions we've received from many of you, both buy side and sell side, in recent weeks. After that, I will be back, and we will open the lines on the telephone to take your questions live. Should anybody wish to ask a question by telephone, you will need to have registered via our website for this option before the end of the fireside chat. We hope there will be no technical difficulties today but, if you do experience delays, please try refreshing your browser. With that, I will now hand you over to Björn.

So thank you, Jess, and very welcome to all of you from around the world. We are very happy to have so many from the investor community who have decided to join in today. Of course, we wish you were here in Zürich that we could meet you physically. But you know the circumstances. Today, these virtual meetings is actually becoming a new every day. Hopefully, this will change moving forward. I am -- yes, I must also say that yesterday, we had one of these virtual meetings with all our 500 highest employees, the sort of called the leadership forum, where me, Timo, as well as the rest of the Executive Committee had a chance to address the new direction for the company. I have now been 101 day in my position as CEO. And that is normally when a CEO should know everything about a company. For me, it was a little bit different because I started even a little bit earlier. I sneaked in already in January. And by doing that, I had the great opportunity to travel the world in all different parts and meet important people and look at our different operations before the shutdown time came. Then, of course, more difficult times when the world from different angles were holding back and companies like ABB and many others were facing different kind of challenges. For ABB, I think the first quarter we saw challenges from the coronavirus first affecting us in the Chinese market, where China more or less shut down for a full month. At that time, we still saw good activity in North America as well as Europe. Then in the end of the quarter, we saw China coming back up, while the rest of the western world suddenly start shutting down. So by that time, we also, during the Q1 presentation, gave you a little direction how we see ABB coping with these challenging conditions. And of course, these conditions vary, of course, between different businesses. But we also said that certain of our businesses are being faced with bigger challenges than other. The one we've seen the biggest challenge for is the Robot business, which is very much focused on the automotive industry, which, of course, had totally shut down. The other businesses, we gave you some kind of guidance, said, yes, we believe that all our businesses will be affected during the Q2, even though not as much as we've seen in the Robot business. It's quite amazing how companies and people adopt to different situation. We start working during this period. And a company like ABB with factories in every corner of the world have managed during this period to keep the factories up and running. We even have 3 factories in Bergamo, which I could call the epicenter of the coronavirus in Europe. And we managed to run the operations and the factories without any infected people. And I must say that we're quite impressed with it. But there is, of course, a lot of mitigated actions that is done, both regarding making sure that components, products and the material flow will, in the end, end up by the customers. And you can imagine that there are challenges like borders which are closed, people have to go into quarantine, and we know that many of our products are also distributed by airplanes, which is not flying anymore. So these challenges are there, but I think the company have coped very well with it. In business, you, of course, also need to interact with your customers. We know that the customers are the most important for us. And as you can see on this picture here, that the -- our businesses have actually managed to cope quite well with interacting with our customers also during these difficult times. On the picture here, you can see that the -- our Motion business have actually increased the number of customer contacts during these times. So hopefully, we learned some from these because some of these visits when you meet the customer through a video conference, you need to be well prepared and the customer really wants to need you, so the quality of the call becomes very good. So hopefully, we can bring some of these with us in the future and learn from -- that we can be efficient and maybe don't need to travel as much as we have done before. I had talked to many of you during the last months, also in relation to our Q1 presentation. And I give it to some of you my first impression of ABB. And it has been very positive. I think it's quite clear for you. And as I said many times, is that for me, ABB is not so new. Being Swedish brought up, go to university there. ABB is all around you. ABB has also been an important part of building up the society that we actually have today. And in my previous jobs, I have colleagues who have previously worked for ABB. So, yes, I even been a customer and also a competitor to the company. So for me, it was pretty clear that when it comes to technology and people, I think ABB is a very well sorted company. I think we're well positioned then. We also have a brand which has been built up during 130 years, okay. Maybe the ABB part is a little bit later, but both of our previous companies, of course, also had a strong position in the market. So it is an attractive brand that attracts both customers as well as employees. How are we then positioned in the different businesses? Since the separation of Power Grids, the part of ABB which will remain of the company is very much focused towards the industry. We are in end segments or in industries, which many of our both competitors as well as other companies, would envy. My belief is that we are in these segments which are well positioned for the global, what's happening globally and the development of these global markets. What are more difficult to understand is to understand why a company that has so many good products, good technology and good solution and very competent people have not managed to create shareholder value during the last 10 years. Okay. I have always had very difficult time to understand the stock market. But I know at least, if the financial performance is developing in a positive way, also the shareholder value should be increased. I think it's pretty clear. You know it, we know it, we need to change this trend. We need to start creating financial performance for the company, which should lead to shareholder value. Yes, I talk a lot about value. I think value is important. And value creation is something that we, as a company, need to do. So what I'm going to talk about? It always start with customer value. The whole purpose of ABB is to make sure that we can help our customers to be more productive as well as more sustainable. If that purpose is there, the customer will be interested to work with us. But at the same time, to be able to be professional and to be on the front end, we also need to attract the best people. We need to be a strong team. ABB has to be the company where we can attract the best talents in the world. And then we should not forget the shareholders. And I think many of us are shareholders and been for a long time. And we feel a little bit left out and I think this is an area where we really need to focus going forward. So let's start to look at what are the financial targets? And we're talking about the midterm targets. I spent quite a lot of time together with the Executive Committee to go through the financial target to say, "Are they valid? Is this the level that ABB should be to?" And I actually believe that these targets are on a level where a world-class company should be heading. Okay. From my perspective, before you start driving growth, you need to be profitable. So of course, the priority from my side, I think, it's to drive the profitability or the operational margin of the company to a reasonable level. And between 13% and 60%, I think, sounds good. But me personally, I will not be happy before we reach the 15%. And another area, which is becoming very important for all our stakeholders, our employees, you shareholders, but also the society is looking for us. We need to have sustainable -- long-term sustainable targets because sustainability is embedded in everything we do in the group. So we need to formulate, not only the short term which we have today, but also long term. And when I talk about long term, these are approximately the next 10 years. They have to be reachable. They have to be aligned with the businesses, and we need to be able to measure them. Good. I said, "Where are the priorities?" I think you all agree on that. Going forward, we will have very strong focus on financial performance. We need to make sure that the financial, not only the whole thing, it's very -- boils down to the whole P&L and the balance sheet. So how are we going to create that going forward? Yes. We have a number of priorities, and I will talk about them now. A very important decision was made last year, actually a little bit more than a year ago, when the Board, together with the management, took the decision to move away from a complicated 3-dimensional organizational structure and move into a more decentralized, with moving resources and focus to our 4 businesses. A lot of things has happened during these years. This transformation has started. And I think in all the heads of the employees of ABB are on line of this direction. And of course, this fits very well in with the way I'm used to run and to drive businesses during my career. And I think also, this is one of the big reasons also why I felt that I would be the right person to join the company. Now we take it one step further. And we move the responsibility, the accountability from the businesses down to the product lines. And then probably some of you that being observant, but I can't read product line. Now it says divisions and it says business areas. So from 1st of July, we will rename what we call the business lines today to the named divisions. And the 4 businesses that we have today will be remained -- renamed to business areas. So you could also say that going forward, accountability, transparency and speed is important. We are making -- we are going to make sure that the decisions, the operational decisions are being taken very close to the customers. I think that's the key to success. To be able to do that, we make our so-called division to us, highest operational level. That's where we conduct the business today. That's also where we have the full accountability for the P&L, but also for their operational balance sheet. The divisions are also, of course, responsible to set up the strategy going forward and make sure that we can create value. We need to make sure that these divisions worked very much entrepreneurial and that this is the place where we foster very competent and good leaders going forward. Then probably someone says, "What is then the responsibility of the business area?" The business areas have a very important role. They governance their divisions. They make sure that the strategies from divisions are in line with the rest of the business area. They make sure that the performance management, that the development of these divisions are going in the right direction. With other words, making sure that we have the right leaders and management teams to drive performance going forward. Corporate. Yes. It's going to be much leaner and not so exciting part or place to work with as it is in the business. So this is a little bit new for many of you. This is today these so-called business lines that will be called divisions tomorrow. Maybe some of you heard that I talked about 17 divisions. But today, I'm presenting 18 divisions. And you wonder what happened. Did 1 suddenly grow up? No. Within Electrification, we added 1 division, and that is the power conversion. This is actually the DC power, which was part of the acquisition of GEIS. We didn't manage at that time to sell the business because of the corona times, so we decided to bring it in and drive it as a separate business for time being. So when you look at these 18 businesses, 18 divisions. It's quite clear that these are large multinational companies. The size of these divisions, they are between $1 billion in size up to -- yes, the largest one is close to $5 billion. So you can imagine, these are not small companies. These are businesses that already exist today. And it was one of the positive experience that I had when I came to ABB and start traveling around. That this structure was actually in place before. This is how we've been conducting business for a long time. Now it's important that they also get accountability and drive performance going forward. Someone asked me, "How well is ABB?", "How is the ABB doing?", "What is the financial performance?" Yes. I think all of you know what we presented the last quarter. But when I look at ABB, I look it in a total different way. For me, ABB is 18 companies in different sizes that are performing differently. Some of them are performing very, very well. And some of the businesses have a little bit more to do, a little bit more challenges to come up to the levels where we expect our businesses to go. So when you see this bubble diagram, you can see that the size of each bubble, that is the size of the business. And you can see the margin on 1 axis and the other 1 is how much profit they are generating. Then some are probably going to ask me. "Yes. There is a big gray ball in the bottom. What is that?" Okay. Maybe some of you already figured that out. These are 2019 numbers. So that is actually GEIS. That was the acquisition of the electrification business of GE. That business is from 1st of January 2020 integrated into 3 of the Electrification: smart power, the smart building and distribution solutions. It's part of that. And the whole restructuring projects that are taking place today is to get the footprint right, making sure that we have the right technology in the product and that our setup in the North American market, which has been our target, will be functioned well. Personally, I think this is one of the areas where we will be generating most value in ABB going forward. So in a decentralized world, you can imagine, with so many businesses, governance by 4 -- our 4 businesses, performance management is key to success. So what I mean with but -- are you not managing your performance of your businesses before? Yes, we are. But from now on, we will be governancing the business. We will drive performance managed through a scorecard system, which is a number of KPA where we can follow the development of the different KPAs over and over a time. This is a unified way, easy way to drive and a perfect tool for our divisions and business areas to drive performance. I know Timo will talk a little bit more about it further on. So if you have so many businesses within ABB that are performing so differently and different in size and in different market environment, what do we expect for them? To drive value going forward. Number one is they need to follow our strategic direction, meaning that each of the business need to be both stable and profitable before we drive growth. Why is that important? Yes, because if we try to grow unprofitable businesses, then we destroy value. Get the performance up to the right level and then drive performance. When we reach, as you can see, we have a number of businesses that are performing very well and is in the growth pace. When we're talking about growth going forward, it can be 2 different ways. It can be an organic way, but also through acquisitions. So how are we then dealing with this going forward? Yes. Now the businesses are responsible for the acquisitions. And why do we make acquisitions? Yes. It's, of course, to strengthen our position against our competitors. So we have moved away from making a large central acquisition to have small bolt-on acquisition driven by the businesses. Continuous improvement. I think everybody knows, to be successful to drive performance is a lot of work. It's hard work. You need to have the organization. You need to have good management to do good performance. We will have this very strong focus in the businesses to make sure that we both drive productivity and capital efficiency in the businesses. These businesses, I mentioned, they are big businesses. And if we look at each one of them, we can see that they need to be #1 or #2 in the market. So why is it important that the business is #1 and -- or 2 in the market? There is a relatively between profitability and market share. And if you are perceived from a customer perspective as the market leader, you have also a bigger chance to have a higher price. The other part is when you're bigger than your competitors, you also invest more in R&D. And I think you understand that ABB is being a very technical-focused company. R&D is important, and we need to make sure that we have the best products going forward because that will be the winners. Many of you might say that, "Okay, you have 18 businesses, governance by 4 business areas. Okay. Now you're going to start working in silos, okay? Is that really going to be productive for them? Are we not going to have any kind of synergies?" Then I say, "#1 is, there are thousands our projects today between the different divisions." And these divisions, that collaboration between these divisions is driven because it makes sense. Not because we are sitting from centrally telling them that you too should work together and you should do it this way. No. They have figured it out because the customers have told them, "This is what you need to do." They might share a distribution center or a production facility because it's more cost efficient. And we all know, the only way to be successful is to be cost leader and to be able to offer the best value to our customers. This is something that we talk a lot about today, and there are a lot of collaboration. And I personally believe, to be a successful leader in ABB, you actually need to be a collaborator. It's pretty clear. I think all of you agree that ABB is known for its technical leadership, for the engineering part, solutions and product offering extensive value to our customers. You probably also agree that today, digital part is becoming a more important part of the value that we create for our customer and more an integrated part of our solutions and product that we are selling to our customers. What ABB is known for, its -- is its domain expertise, which has been built up during the years, close to the customers, together with the customers. 2016, ABB took an important decision. And that was to say that we should accelerate our investments into the digital area. We should also create a common platform for the group. At that time, we took the decision to create a central digital organization we call ABB Ability. And ABB Ability is the basis of the connection of all our components and all our digital offerings in the market. We decided at that time to work together with Microsoft and to use the Microsoft Azure cloud to do the connectivity. During this period, we have built up cloud solution, where our different businesses can connect on a common cloud. I think this has been very successful and meant a lot of good to us. At the same time, we have continued to invest in our different businesses. And we have, today, many solutions, digital solutions, connective and software solutions that have been developed in our common development centers in places like Bangalore, in Poland and in Switzerland and in North America. And these are being developed by the businesses close to the customers. So we have now decided, in line with the strategy of decentralization, to move the platform development project into the businesses. And this will today be governanced under our Industrial Automation business area and support all our businesses. Portfolio management. One of the important part for ABB or for any company is, of course, to see that the businesses that we operate, that ABB is the best owner. We need to challenge the businesses. Could there be someone else who could create better value into them? So what do we do? Yes. As we look at the strategic attractiveness, we look at the potential value creation that we have in the business and if it fits together, if it fits together with the ABB purpose. And as I promised before, we will come back somewhere during autumn and inform you as investor also, if there are, and in that case, what businesses that we would divest from the group. I think it's important to be in businesses where we believe that ABB can create the best value. Okay. I mentioned smart leaders collaborate. That's the way we keep the group together. But we have also a formal way, and that is what we call the ABB Way. That actually consists of 4 elements. These 4 elements is: the business model that we operate in; the people and culture; the brand; and the way we governance the business. And when I say governance the business, that are policies and procedures. The ABB Way is owned by the Executive Committee. And the center of all these resources we have in the group are building up the content of this because there are certain things which is important that are common in the group. We have an open job market. We have a compensation system because we want people to move. We have a brand which consists of a huge value. It is important. So ABB Way is owned by the Executive Committee and will continue to be developed. This is actually a development from what you have previously heard the ABB-OS program. OS has been also very much focused on reducing costs. And as soon as we now come to an end to this project that we managed to save the $500 million that we promised. It automatically moves over to a way that more describes the way we operate. I'm ending my part here. And, Timo, would you continue?

Thank you. Thank you, Bjorn. And welcome from my side as well to this webcast. And I really hope you are all doing well during these unprecedented times. So I'm going to talk a little bit about ABB operating system becoming ABB Way now from a CFO perspective, and also a little bit about capital allocation. So ABB operating system has really given us structure during the transformation, which we launched December 2018. And I want to be crystal clear. The total commitment to the $500 million cost reduction continues to be there, and we will execute to that target. But as Björn said, we will have something now which is more holistic way to manage the company going forward. And from my perspective, there are a couple of things which will evolve, but there are also things which are brand new. So first, our simplification program will evolve, and we target even faster delivery and even simpler corporate structure; second, we are introducing a new performance management system with the scorecard, and I'll talk a bit more about that in a minute; and third, also our portfolio management will evolve towards a very systematic, continuous portfolio evaluation. So let's start with the simplification and leaner Corporate. As you know, in 2018, we had about 18,000 people in the corporate domain and about $1.1 billion of corporate cost in our operational EBITA. And under the ABB operating system, we have now moved to a structure where we have no regional organizations. We have no country organizations, and we have no central business functions like marketing and sales or logistics or something like that. And our Corporate, as was planned, is now under the 1,300 people. And ABB's continuing operations headcount has reduced, as we are now here year-on-year, more than 4,000 people through the program. So we are tracking well towards our $500 million cost saving, and we are looking to expedite this. And I want to be very clear, we are not counting any of these COVID savings to this number. So naturally, this month, our travel is probably the lowest in the Corporate history. But that is not what we mean by ABB-OS cost savings. This is going back to what Björn showed on one of the slides on the motion, for example, sales contacts. If we can make our travel costs sustainably 20%, 25% lower, that is something which we will count. And we will continue to keep the rigor that we only count cost savings when they hit the ledger. So what then changes here? There are 2 things. First of all, going forward, the Corporate will focus only on strategic and financial activities. As digital and R&D now move fully to the business domain as well, there will be no overlapping activities between Corporate and businesses. Very, very clear responsibility division. And second, we continue to target to get to the Corporate cost to below $300 million, but now with new allocations. So our margin equation will become extremely clear. If our business areas would operate approximately at the midpoint of their target margin ranges, and we would have approximately the current revenue split and you take out the $300 million Corporate cost, we would be quite close to this 15%, which Björn was discussing earlier. Then to the new performance management system, and this is really something which has been introduced by Bjorn to ABB. So what are the benefits of this system? Let's talk a little bit first on how this thing works. So from Corporate, we will define KPIs, maybe about 15, maybe a little bit more. We are still working on refining this for ABB purposes. But these KPIs will be exactly the same, measured exactly the same way. And we will have 3 to 5 years fully backwards-compatible data. So this will really be a management accounting cube where we can follow the divisions, business areas and Corporate in an easy-to-use visual format. And this is quite easy to say, but it actually is not that easy to be implement, believe me. I mean, I have been working on this now, what we'd say, like 6 months, and we are now getting there. But when you have it, it is really, really powerful. Because you will have full transparency, and you will have only one set of numbers. You're not talking about why is number this number or your number or my number. It's just a number and what you do with that. And you can then systematically see, division-by-division, if the quality of revenue is moving to the right direction with the right gross margin, if we are improving productivity. If the net working capital components are moving to the right direction year-on-year on a continuous improvement. And of course, on a group level, we can then focus how divisions support the overall growth targets. And we will implement this from Q4 -- sorry, Q2 -- Q3 onwards. So we'll actually moved to this now in July. We'll see how that goes. But what is also important is that when we move to a new performance management system, it needs to impact our incentives. And we want to have even more differentiation here. Businesses, which are in stability, profitability or growth phase will have different incentives. And this will be measurable scorecard KPIs only. So we are really looking to further align both short- and long-term incentives with pay for performance. So let's then go back to the portfolio management. Björn touched this topic as well. And I'm going to go a little bit through, let's call it, the methodology of what we use here. So there are material improvements to the ABB portfolio management tool, which we have been creating during this year and, of course, discussing with Björn and the whole executive team. So here, you can see that on the y-axis, we have the market, market growth and profitability. And here, we also measure what we call right to win. And here, clearly, very important thing is that the right to win is dependent on if you are #1 or #2 on the market. And we have a scoring system for this thing on the y-axis. On the x-axis, we talk about performance and how we're performing to full potential. And here, we have purposely weighted operating margin performance or margin performance a little bit more now than growth, given where we are as a company. So we have 3 components: ROCE, return on capital employed. But of course, improving that is also quite dependent on improving margin; we have the margin itself; and we have growth. Each of these are having 1/3 of the weight. So this is a very systematic way, which we will move forward with. We continue to discuss if we should move from operational EBITA to EBIT and this is something which we will come back to after this year because we still have, during this year, with power grids and noncore, quite a few let's call it, nonoperational items running through the P&L, but we are definitely moving towards measuring our divisions and the businesses with EBIT. But the core portfolio methodology is only one component in assessing the best owner. As Björn said, we also have the fit-to-ABB component, and we naturally look to create value here. So we will look at the valuations, which we would see for different businesses on the market quite in an unsentimental way from that perspective, from financial perspective. So I'll give a super quick example from Electrification. We have exited the solar business. We simply did not see that as an attractive market for long-term and something which could have added value to the ABB portfolio. Björn spoke about the power conversion business. We announced the strategic review, went through a process. We couldn't find a value, which would have been satisfactory. Decided to keep the business, and now we will continue to deliver or develop it as part of the ABB portfolio. And we also use the portfolio management system for improving operational performance. And here, you are well aware of the electrification installation products example, where we have seen now significant margin improvement when we are really focusing on the right KPIs on gross margin and also the number of SKUs and so forth. So to summarize, we will have a very systematic framework both for business improvement as well as for assessing divestment and acquisition situations. So before I hand back to Björn, just a couple of words on capital allocation and financial resilience. On the left here, on this side, you see the expected cash-in at ABB over the next 3 years. So we think and see a picture where our operating cash flow, and this is now after R&D or growth investment, will be more than sufficient to cover both CapEx as well as our dividend outflows, which here are based on current dividend per share. And further, we expect significant cash proceeds from the Power Grids exit and possibly also from other asset disposals. And this cash inflow from Power Grids will significantly strengthen the near-term financial flexibility, and we remain committed to returning the Power Grids cash flow to shareholders in an efficient and responsible way through a share buyback. And we continue to think that it -- within this framework, we have scope for inorganic opportunities, 4 divisions where growth this way would be an appropriate strategy, although we are not expecting any large M&A in the medium term. So our finance sales -- financials are sound and ABB has a strong balance sheet. And we continue to aim to retain single-A credit rating. So with that, I thank you for your time and attention and hand back to Björn. Please?

Thank you, Timo. I think this sounds promising from my perspective. I think we're very much aligned on these points. Now it's -- I talked a lot about creating value. I mean this is important. And one of the values that is important for us to create is employee value. ABB needs to be an attractive company to work for. We must attract the most competent people to be able to deal in all these areas where we are operating. And we need to create a performance culture within the group, which is booked on good leadership. It's an open job market, good training programs, career opportunities, the possibility to work in different parts of the world or in different exciting businesses. Diversity and inclusion, important. And of course, the environment that we work has to be health and safety, and we have to expect that everyone that go to work should come home in the -- in a healthy and safe way. Very important and high priority within ABB. Sustainability. I'd like to talk a little bit about around this here, because I mentioned it from the beginning. ABB has been working with sustainability for a long time. There are a lot of good projects, which is taking place. But I think also from all stakeholders' point of view, it is important that ABB acts as a leader within this area. And when we look at the sustainability part of ABB, it's actually embedded in everything we do. If you look at the products and the solutions and the service that we offer, really helps our customers to become more sustainable and more productive. On the other hand, we see all our operations around the world, which has to be actually living up to the standards that we expect everybody else to do. To be a little bit of a road model in the market. Short-term and long-term targets is important, and we need to be able to measure that. And from our perspective, we see there are a few companies are so well positioned when it comes to sustainability than ABB going forward. So as the last slide. What is my priorities going forward? First, we need to deal with the short-term challenges. That is actually the coronavirus and all the implications that we are seeing in our own operation, making sure that we manage to serve our customer in a professional way at the same time as keep the costs under control. We need to make sure that we now transform into this new structure. And as I said, the good thing is that we have the whole structure today. And the management and the Board started already a year before. So it's very easy. Everybody is aligned in this direction. It makes it very quick, so fast moving. As you saw on the slide, we have a number of underperforming businesses. Here, we need to put focus. We need to make sure that the operational performance or the profit margins are coming up to the levels that we expect from the group. We are challenging the businesses. And together with the business area president, we are going through our portfolio. We're making the portfolio management. And we're really looking into that in an unsentimental way. And we need to decide what businesses, where can we drive the best value within ABB, or where can companies drive more value outside the group. Timo, he mentioned the capital allocation priorities. They are unchanged. We need to make sure now that we close the deal with the Power Grids by the end of the month and that we distribute the cash, as we have said. There will not be any major acquisitions in the midterm. We have done numerous of large acquisition during the last 10 years. Now it's important that we get the full value and synergies out of those business. At -- I already promised you that before. But transparency is important. And I know for you, you need to understand ABB. You need to understand our businesses and where ABB is going to create value going forward. By that, I would like to thank you very much and looking forward to some exciting chats. Thank you. [Presentation]

Welcome back, everyone. Before we get started with the conversation with Björn and Timo, let me introduce myself. My name is John Armstrong, and I'm the Head of Financial Planning and Analysis at ABB. And I've been very fortunate to have been involved with the performance management evolution that both Björn and Timo had talked about earlier. And as Björn had predicted a couple of months ago, I've already learned to love the performance management system that both he and Timo had talked so much about. And with that, why don't we get into some of the questions that the investor community has been wanting to learn more about.

Great.

So Bjorn, the first question for you, I'll give you an easy one to start. Why did you decide to take the job at ABB?

Yes. That was maybe not the easiest question, being in my age and having a good job in the other hand. But on the other hand, this is a secret. You -- don't tell anyone about it, but when I was in university, the most hot company in the market, at least in Sweden where I studied, was Asea and Percy Barnevik was the hottest CEO you could even dream about. And as an engineer coming out, I said, of course, I would like to join as a trainee at ABB, that would be fantastic in Västerås. And you know what? I wasn't even called for an interview. So this is a little bit for my event. And now sometimes so much and then, you know you should never give up. It gives you an opportunity in the future, then you can grab it. So of course, I'm very happy to be part of the ABB group. I'm very proud.

Great. Great. Another question. It looks like you're using the same playbook as Sandvik for ABB. Now ABB is bigger, and some would say more complex. Why do you think that this strategy will be effective to improve the performance at ABB?

Yes. And, one, I think this is a business model that actually, I think, I don't know we both developed, but the decentralized model by Atlas Copco a long time ago where I spend many years into it too. Many investors have told me or other people said, "The ABB is so complicated. It's going to be so difficult, the way they do business and so on." and to be honest, I spent now 5 months almost traveling around, learning about the businesses and get into it. And I'm still looking for the difficulties. And it's -- I don't see any difference from any other businesses that I've been working. We have these 18 well-functioning so-called divisions going forward with good management in place and strategies. Now we have to make sure that we drive performance management out of that businesses. Sometimes there are some interaction between some of these divisions. But that's been -- many of the Motion products are sold through projects, which are run by Industrial Automation. But they saw that long time ago. The profit comes at one part. So for Motion, they see Industrial Automation as 1 customer. It could also be another company outside, OEM customer or another integrator. So in a way, these rules between the businesses is there already and not so -- not very difficult. So I think it's -- I don't see this more difficult than any other company than I worked with.

Okay. That's great to hear. I think with a fresh set of eyes and as you've traveled around a bit to see the company, now 101 days in, what's your view on why ABB historically had underperformed from a financial standpoint? And why do you think it will be different this time?

I mean, I get that question sometimes also from investors. And I tried to answer a little bit in my presentation. But it's quite clear from what I said. I think it's a complicated business model. It's not easy to take different co-decision when you are running so-called division or business line when someone else is pulling the shots. The country organization wants to decide and then you have Corporate who wants to interfere. In the end, maybe 30% of your cost is being distributed and not under your own control. So why, as a manager, should you actually take this difficult and get this accountability? So I'm a very strong believer of performance management, but it is the transparency, it's the accountability and the speed you do business, which is key to success.

Okay. And Timo, do you agree with Björn's assessment?

Yes. I very much agree with the direction, I think, with the ABB Way, which Björn is introducing and which we are now building in, we will become more long-term systematic company. We will have a long-term systematic setup with clear accountabilities and responsibilities and clarity brings speed. So very much so. And we will also have clear focus on the right KPIs for businesses, which are in different part of the stability-profitability growth curve. So, yes, I'm very much behind this direction.

Okay. Great. Björn, from your standpoint, are the 4 businesses that are currently making up ABB going to remain? For example, a potential separation of Electrification? And if they are to remain, why do those 4 make sense to be together?

First, I think when we look at the group by totally, we've been looking into what we call the project we call the purpose project, where we look what keeps the group together? What is our aspiration? What is our DNA? What is the begin? And that's an important part of it. But we're also doing, as we mentioned, we're doing this portfolio management where we're really going through each of the businesses, and we're looking from ABB Way. Is this a company where we think we can drive superior value from? If we don't see this, I think that it actually would do better somewhere else or with another company. I mean, unsentimentally, we would let that company end up in that part because in the end, it is about value creation. And I think it's too early to give any indication what businesses and if the larger part, that's something that we will -- it's what we are dealing with now, and that will come back at the Capital Market Day, and we'll talk more about it then.

Yes. So -- and that's when investors would first anticipate to understand if there was going to be something else that we either sell or we'd look for small acquisitions?

I mean, #1 for us is first to make sure that ABB is driving value, improve the financial performance in the businesses that we have. And if some business cannot live up to those targets and objectives we have, of course, we have to question ourselves, is these businesses where we want to be in?

Yes. Okay. You've talked a lot about margin. And specifically, your belief that ABB can and should be at 15% margin. Do you feel that, that applies to every division? And from your experience, when do you think that, that can start to become a reality?

But I mean, you saw the chart with the bubbles there. If some of the business would deliver 15% margin, I would be super disappointed. If some of the other, which is underperforming, they reach up to 50% would be great. It's important to look at each business from where they are today. And the importance to create value is to make sure that each of the business becomes a little bit better every year. That is how we drive value in the group. Some of them have a lower -- where they work from and some of them are already far way over 20% and really a successful businesses. They need, of course, to work with growth. So I think you need to look at each business. You have to make sure that each strategy for each business is in line with their performance.

If I may comment here, I -- that's why it's so important that we use the portfolio model also for operational improvement.

Yes. Absolutely.

Another to build on the margin discussion a little bit. When it comes to R&D, we always get a lot of questions from investors on whether or not we're spending enough in R&D and to continue our differentiation. Do you think that -- and especially with this new focus on margin, that will be more questions coming our way. Do you think that we at ABB are investing enough in R&D? And what is the right level?

You have to look at each business. And I think the R&D expenditure is of great interest for us. And I think it's part of our DNA. And me, as being also a customer to ABB during many years, I always said that ABB has world-leading technologies, leading products, solutions and services. And normally, our customers feel that we create a lot of value for them. That is not normally the problem. We, today, invest approximately 4.3% of our turnover in R&D. Is that a good or a bad number? I think it's quite high. Normally, companies, engineering company, now between 3%, 3.5% to 4%. We are a little bit higher there. And then it varies, of course, if you're in service business or if you are in solution and so on. We should continue to do it. One of the KPIs, which are part of the scorecard, is what we invest. If we see that some of the divisions are actually cutting down on the R&D expenses, it really raises a red flag. We need leaders to drive performance, but also that understands that the investments in R&D and the digital solutions is going to be the future revenue streams.

Yes. And that's where that transparency as well, looking at it the same way for everybody is so important that you could really get that visibility.

Yes, absolutely. Yes.

A question for Timo. Something we've been very focused on since the beginning of last year was -- has been ABB-OS. This has now become the ABB Way. We've said that we have a good line of sight to the $500 million of savings. Now with COVID-19 forcing us to take even more actions, why not drive that target or raise that target at this stage?

Yes. Let me do a bit of a segue here to the R&D point first, because this $500 million savings, it's not coming from R&D. Our R&D has actually increased. I mean, if we go back to 2013, we invested about that 3.5% and now we are investing close to 4.5% there, as you mentioned. So it is actually quite a significant proportionate increase. On the $500 million, this is a clear target, and we have a clear measurement system. We are not upping the target at this point in time. We don't think that would be the right thing to do because this is not something which we want to continue to drive centrally with the scorecard system. As Björn was describing, the accountability really moves the businesses. We do not want to micromanage how they do their cost equation. We give them certain targets and then they should execute to those targets. But on the $500 million, because we have still certain ABB-OS activities ongoing, we continue to track it, as I explained. And we said originally that we would expect to reach that run rate target sometime during 2021. We said we will expedite. Let's see how much we can expedite. But I can just say that we are on good track on expediting. And again, I want to remind, we are not taking any COVID benefits into this equation.

Thank you. The next question is around the proceeds from the Power Grids sale. How firm are you on the commitment that we put that back into a share buyback? And why wouldn't we focus more on M&A? It's really when you think of those proceeds, a once-in-a-lifetime opportunity to potentially get into a software or a PLM space.

First, I said we are committed to what we promised, and we make that -- when we signed the contract already, 2018, that we would distribute it -- the cash that came in from that to our shareholders. And I think we also decided -- decide that we should do it in a responsible way, and we should start when the deal is cleared. So we still need to do it. That's the priority. That's where the focus is by the end of June. When it comes to acquisitions, from my perspective, it boils down to what I said. It's stability, profitability before growth. I think ABB is not living up to the financial performance that I think a company like ABB should do. That's where we need to focus. We made a number of big acquisitions during the last year. We need to make sure that these acquisitions deliver what we have promised before. That is the focus. We also may have to make sure that the businesses really comes up. And that's going to take some time to do, and that's where the focus is going forward. We are not planning to be a software company. It's -- I talked about the domain expertise. We work with solutions together with our customers. We, for instance, in drive, we have more connected drives than any other company in the world. And there are so many exciting solutions that are being developed in the businesses close to the customers, and that is our strategy. I know that Timo have worked a lot with this strategy also going forward. So maybe you'd like to comment anything on it.

Yes. Thanks, Björn. Yes. So of course, having a bit of a technology background, this is sort of close to my heart in a way that I have been in a company which did quite a bit of platform software. That is not an easy thing to do. Our value towards our customer is really -- our customers is really in the application know-how, as you said. And our offering is very software-content rich. But the software is really as part of a product sale often or it's part of a service sale. It's not selling software. And this, I think, is the right strategy for the company, and this is how we are driving it going forward as well.

I think this is very important. When you talk to our 4 business leaders, the one who runs our 4 so-called businesses going forward, who, of course, set up this strategy together with their businesses. I think they are all aligned with this strategy, and they feel very comfortable that they -- with their solutions, their product offerings are market leaders. I think that is the important -- that's how we would like to drive it going forward.

Okay. A question on digital. Digital is now being managed by one of the business area leaders versus Corporate. In your eyes, does that mean that we're no longer competing in the sphere with, say, Schneider or Siemens? And how do we make sure that we continue to invest in digital now that, that will be out of the Corporate ownership?

If you look at the businesses and the strategy that we're going forward says, yes, we governance the platform part of the business through Industrial Automation, Peter and his team, but all the businesses are actually owning this platform and owning the development of this. All the businesses, I mean, we are in so many applications, so many businesses. We are actually accelerating the investment in software solution and digital solutions together with our customers. It's a little bit different from the strategy that we heard from Schneider from their part, but we think that in the areas where we work with our customer solutions, we think that we can deliver world-class solutions. Maybe, you'd like to...

Yes. I know, I think it's very important to understand that we can scale within the applications. Drives, which you mentioned, is a great example where we can scale our software within the application. Exactly the same is happening with RobotStudio. We can build a new application and we can scale it. And same is happening in Automation Studio, in B&R and in many other areas of the business. But it doesn't scale on the platform, it scales within the applications where we really have the domain knowledge and work closely with our customers. And that's where we can differentiate, and that's where we really can create value.

Great. And one last question before I hand it back over to Jess. What can investors expect from our Capital Markets Day in November?

I think it's a good question. Today, we're talking about the operating model, how do -- we will conduct business going forward. In our Capital Market Day, which comes in November, we will be focusing on the operational strategies. So you will see more of our 4 business leaders being more transparent how our different businesses are going to create value, show that we are #1 and #2 in the businesses and really how we're going to create this world-class value going forward. So it's a more business strategy operational way of working. So it will be very interesting to listen into. I hope we'll have many of you that will join up.

Great. Great. Well, thank you, Björn and Timo, for all of your perspectives and answering some of those questions, and now we'll get to more with Jess.

Thank you, John.

Well, thank you all, and thank you to everybody that signed in for staying with us. We are now going to open the lines to take questions from the phone lines. I have been asked by the technical team to please ask those that are asking a question to mute your web browser in order that we don't get an echo on the line. We have a lot of people that have joined us today. And in order to give everybody or as many people as possible a chance to ask a question, we will ask you please to just ask 1 question at a time today. And so we will now take the first question from Alex Virgo of Bank of America.

I trust you're all safe and well. My question was on the incentive framework and how, Björn, with -- you've sort of interacted with the employees in the various divisions, you mentioned, as you started and snuck in, I think you said. So I'd be keen to understand what your impression is of the people, the breadth and depth of talent you referred to briefly, but perhaps most importantly, their response to the change in incentive framework already. And how long do you think that will take to fully embed?

Thank you, Alex, for the question. Yes, of course, I met so many people and discussed with both young talents and more management to hire people in the organization. #1, I think the ABB brand really attracts a lot of talent. That's pretty clear. So I'm -- I think the level of talent that we have in the company is very good. Now it's, of course, important to utilize that, not least in our businesses to be able to drive performance there. And you know as well as I do, and Timo is in line because the company actually moved in the direction of incentivizing our talents and our leaders when it comes to financial performance. I think that's a really good start, which have been done. And Timo and I have discussed it on the part, and we will continue to develop this business because in the end, we think it's the financial performance, which should be the basis for this incentive system and not too many soft swings. We need to deliver good numbers. Maybe you -- I mean, you've been part of building up the [ setup ] that we have today, which I think is pretty good.

Yes. Yes. So as we have discussed, we already, last year, moved to a setup where the currently called business areas, we're able to set different KPIs and then we, of course, go through them from a corporate perspective and see that they are moving to the direction where we want the whole ABB group to move. So I think we're making good progress here. And as we were discussing today in the presentations, we will move even more towards a setup where we really have different KPIs for stability, profitability and growth phase. We have also introduced new KPIs. Return on capital will now be more important KPI in our setup as part of the, let's call it, the cook book from which you can choose. And then we have a KPI called operating free cash flow, which is very much now following this responsibility and accountability slip -- split that Corporate is responsible for cash and tax. So this is all cash flow impacting a division or business area besides tax and finance.

And we'll take a question now from Shane McKenna of Barclays.

Björn, in terms of the increasing transparency, we've already had specific Capital Markets Day for the Electrification and Robotics & Discrete Automation division. I mean notwithstanding the CMD that you're now going to host in November, can we still expect similar updates for the other divisions? Especially IA, as it seems the market has questions around the current sort of strategic logic of including turbocharger and marine and ports within this business area.

Thank you for the question, Shane. Yes. I think it's -- I'm glad that you like this transparency, which has already started. And I think this is very important. I mean, you need to understand the businesses where we operate. And you need to understand what connects them to ABB, but also how we can drive value, and you have to feel comfortable about that. Yes. We will definitely go in deep in. And I agree with you that one which is more difficult to understand from outside, that is industrial automation. Because it consists of so many different businesses working in so many different end markets. So yes, we will definitely take a deep in look with that. We might even have a separate -- yes, he's looking at me now, a separate Capital Market Day looking at Industrial Automation going forward to clarify how that businesses and how we generate value.

And we'll move on now to Jeff Sprague from Vertical Research.

I just want to come back to the portfolio and fully understand it’s premature to make any big pronouncements today, but you have been a set situation for several months. I'm just wondering, without naming business areas or naming divisions, which clearly would be premature, what percent of the revenues of the company in your initial estimation might just not simply make the cut here? And again, if your decision is not final, there's more work to be done to come to a final determination. But you had a lot of experience in these matters. But just really curious on your gut view on that aspect.

Yes. Thank you, Jeff. Yes, I agree that the question is it's a little bit premature at this stage. I think it would not be fair for me to go in and talk about this. We're doing the job. And I think this is actually the job of the 4 business area heads, so Peter and Tarak and Morten and Sami. They need to work with their businesses. We need to do the job. We love to challenge them. This is a passion that we have centrally. We'll continue to do that. And I think a good time is that in September, we'll have a board meeting. That's when all the strategy, operational strategies, are in place, and that's when we will discuss this with the Board. And then I think it will be probably a good timing to give you a little bit more an insight on that when we come to the Capital Market by the end of the year, somewhere in November. I think that's probably the timing that makes sense. I mean, in the end, you probably realize that even though we find some business that we would sell, this is not the time to sell a business in the coronavirus. When you sell a business, you need to have good financial performance that's good. You need to do it in a very professional way because it's a lot of value that sits in all our businesses, and we are not prepared to give anything away because this is our shareholders' value. And even if it's part of the company or outside, will be outside, we expect a lot of money for those businesses.

And moving now to Guillermo Peigneux of UBS.

Thank you, Björn, Timo and Jessica, for you participation today and I wanted to elaborate a little bit on portfolio management as well. I think that you can find very strong relationships between some of the businesses of ABB, some of the business units in which, for example, measurement and analytics will be sort of feeding into many other subsegments of divisions, in the portfolio lines and so on. How do you plan to deal with these potential -- these synergies if you were taking a decision to divest a relatively large portion of one particular business unit?

I mean, as -- I think Timo talked a lot about that. I think one was financial performance; one was market attractiveness; and one, the fit into ABB. I mean how do we deal -- I mean, I can give you an example today. In Industrial Automation, they have that -- we can take, for instance, marine and port. This is a very clear business where one of the key products that is part of this division is the Azipods. I know, I love the Azipods, and I think it's one of the most brilliant products in the market. And when I was in [ Västerås ], I dreamt about those products. And now finally, I'm sitting in the boat with them. But if you see, when they sell these automation solutions for ships, it's a lot of motors. It is a lot of drives, which is actually part of this solution. So there is a big connection between these businesses. And of course, we take this in consideration when we look if it makes sense that the business can generate value within the group. I mean, this is -- I know you love this area, Timo, so maybe you can add on to this, if you want to.

Yes. I'll comment a little bit from the, let's call it, unsentimental financial perspective because in any DCF model, as we well know, we can also build the dissynergy, and we have to get paid for that. And we need to really understand, does it make sense or not, but that's how we look at it. But of course, fit to ABB is very important. So we would be definitely using that as one of the 3 lenses, as Björn said.

I think we're a good combination. You have The Street financial and I'm the emotional.

And coming through now, we have Mattias Holmberg of DNB. Go ahead, Matthias.

Looking through the fact sheet you published in conjunction with this presentation, we can see a handful of the divisions, as you call them, are not in the #1 or #2 market positions that you've highlighted as a very important factor for success. So I'm curious as to how you think of getting these businesses to that position.

Yes. I think we gave you out a little -- this is part of the transparency that we think is important from you. And you have to look at, but you say there are many, or you probably see that very many that are #1 or #2, I think that is we have a couple of them, which might not be there. And of course, that has been taken in consideration. Sometimes you have to look at -- when you talk about the segment, you can also talk about the niche of the segment. But it's more how your customers within that niche is looking at you, how they perceive you as a market leader or not. Because in the end, it boils down to become price leaders. So you can actually be within a small segment within a large business, you can be perceived as a market leader. That's one thing that we will be discussing and talking about going forward. I really don't know which of the businesses that you are referring to, and I don't think we should discuss it here and now. But I can assure you during our sessions going forward, I would love to talk about some of the businesses and how they are perceived in the market because they really interest me.

Can I comment on this as well? So clearly, our divisions can also use as applicable to them, both the scorecard system as well as the portfolio methodology going deeper into their sort of product lines where they can assess exactly what Björn said. We on -- from the group level, we look up to the division. But of course, they can use these to assess further the situation on different product lines where they are active.

I think when we talk about this Industrial Automation, it's quite interesting. Because in certain segments, ABB is a clear market leader of pulp and paper and mining in the automation project that we run. In these parts, we normally get good, really good margin. Then there are segments where you're not as strong as maybe as your competitor. And then always price is becoming a part here. So it's important, of course, where are you focused, where you're putting in, and -- but also your portfolio that you're offering.

And I've got Martin Wilkie on the line now from Citi.

I just want to come back to the point on market leadership positions. You talked a moment ago about being #1 or #2 in many areas. But revenue growth has lagged competitors over quite a few years at the group level. And just to get an impression as to whether you think those market leadership positions have and rolled it over time and end market mix is often used as a explanation, but I'd be very interested to hear your first impressions as to the momentum in those market-leading positions.

To be honest, I think in the most areas where we operate, we have a market-leading position. The question we can ask is, "Have we used that marketing-leading position to drive value fully out going forward?" That could be some question. But definitely, when I look around and I see the different businesses and all these exciting projects that we are driving into, I feel that technology-wise and in market position in these things, we are well positioned. Next step now is we need to utilize these positions to drive performance. And I think we need to be clear as a company what we expect of these businesses. But we also need to be clear about the management that drives these businesses. My experience is good management drive businesses can make wonder and create a lot of value. So, yes, this is what we need to do. It is, of course, all centrally, but the biggest job here lies with our 4 business area heads. They need to make sure that we have the right talent, the right management and that they drive the right performance. And that we are focusing on the right type of project that gives value.

And I've got a question now from James Moore of Redburn.

I've got lots of questions on the portfolio, but I think I'll save it for November when you can be clearer. So hope you can switch to profitability and margin. And I've tried to do the exercise of looking at your 17 units on sales per employee. It's -- and they're comparing it to all those sort of relevant peers like Napier and turbocharge, et cetera, et cetera, at a detailed level. And when I do that, I find quite a few areas where ABB is some way below the best-in-class on sales per employee. And I wonder whether you see that as the principal lever behind your 15% aspiration or a small part of the jigsaw of getting there?

Okay. I think we can go in. And I think that you and I will have a chat when we meet next time, and we can discuss the different businesses because I have a viewpoint on many of them. And as you can see on that chat also that many of the businesses are performing extremely well on the part. But I think there is so many details in this part. Then, for me, it's more important you have a status number. Moving forward, we say sales per employee needs to develop in the right way. That means that we need to create productivity improvements, at least 3% per year. I think in good years, it could be 10%, it can be on that level, but never go under 3%. And we will make sure that, that is part of our incentive programs because that really drives. Then you can say that different businesses, depending how vertically integrated you are, how much have you outsourced to different businesses. And that can, of course, vary between different businesses. But I'll be happy to sit down and to discuss any of these businesses going forward and when we are going to look. And I hope you will do that also with the business area heads because they are really into each of these businesses. But I think it's a little bit difficult here. This is not my viewpoint, as I said from the beginning.

And we'll take a question now from Joe Giordano of Cowen and Company.

Björn, you mentioned earlier the challenges on the old structure of product management when you have interference from the country management, from the Corporate, now you're stripping out the Corporate function and you're pushing down to the divisions. What is -- how do you prevent them? What's the risk of a large organization where like the business level management layer kind of over time, beloathes and kind of replaces what used to be to Corporate. So where you're kind of changing it, but then it's like expanding and how do you prevent that from happening?

The previous management made it pretty easy for me. This actually started over a year ago, I said, when we made the decentralization. We had for -- or a little bit over a year ago or a little bit before then, we had over 17,500 here to 18,000 people in Corporate proposition. That also includes the country organization. That has been actually moved over to the businesses or taken out. So we were around 1,300 people at this moment. We have an objective to get it down to under 1,000 people. And as Timo said, our objective is to have central cost of $300 million. And it's important to define what is the role of the center. And that's what we've been working a lot with here during the spring time. And we do not want to overlap here with what the businesses does and what we does. And I must say, I've done this a number of times, discounts or transition. And I have never had an easier way of cooperating and coming in with my ideas. They already been adopted by the business leaders as well as Timo and his team. So I'm quite amazed, and that's probably why I look so happy.

Can I comment on this again? From -- so from a financial equation, this will be, again, very clear and because we target $300 million or less Corporate cost. But then when you take a business area, there will be no business area cost, which not -- would not show in the divisions. And that's one way to make sure that the business area does not build as you refer a new Corporate.

Correct.

So there will be a pushback.

So what -- in the end, what we're going to see in ABB is that the ABB performance is a sum of these 18 divisional performance. It's very simple.

Exactly. Plus the $300 million or less.

Plus the $300 million. Yes.

And next on the line is Daniela Costa of Goldman Sachs.

Hope all are doing as well. I -- What's very interesting what you discussed around the scorecard, and my question relates to some more clarity there. I think on the slide you mentioned budgets being replaced by 5-year rolling forecast. And I was wondering if you could give us a little bit more of an idea of what is the time of the -- of how the time line of how performance is measured. Is this an absolute scorecard, a relative scorecard to peers or to the end markets? And also when do you make that cuts of stay versus don't stay if the business doesn't improve? Do you have a time line in mind, years or -- yes, any color around that would be great.

I mean I love the scorecards, but I know Timo loves them also, so I -- he has been one designing them for ABB together with John, as you'll have heard also. So I'll let Timo give a little bit inside details and I can follow in if there's anything.

Yes. Yes. So first of all, we will move to the 5-quarter rolling forecast actually now. So we have just done it. And that will always add a quarter. So when we come to a calendar year, because we will still have annual incentive plan with the calendar year, we can use the 5-quarter rolling automatically as basis for that. Do we then just take it? Or do we ask for some changes that we have to see by the process? So that's how it will work. And then the scorecard is always a system where we measure performance improvement. It is not about measuring against somebody else. But of course, we need to, in this model, very thoroughly follow market share because those are some of the really, really important parameters. If the market is down, our business can go down as well as we follow the market share or improve market share. That's what we -- that's why we talk so much about this quality of revenue. It is okay for revenue to go down with the market as long as you keep or increase market share and then act swiftly with speed on the cost equation. And that's how you drive performance with the scorecards.

Yes. I think it's a good -- a very good description. And I think we roll it in, and it's a good tool. And I'll say it again, it's a great tool for us to follow the businesses, but it's mostly important is that the division and the business area, this is a great tool to make good decisions, good business decision based on these scorecards' performance. Yes. We will work with it, and it will be introduced very soon.

July.

July? Even better.

And we'll take a next question from Gael de-Bray of Deutsche Bank.

I think you made it pretty clear that there's going to be a much greater focus on profitability going forward, stability and profitability. The question I have is more on the growth side of things because it seems that ABB has lost a bit of share, vis-à-vis, some of its many competitors in process automation or electrification in the past few years. So do you see some specific areas where you're lagging some of your competitors either from a technological or go-to-market perspectives and where you would like to put a greater focus on going forward?

Yes. Why don't we talk a little bit about Electrification, because I think that's an exciting part of the ABB business going forward. If you look at ABB, we are a clear #2 in the world market. But if you look at certain markets, if you look Italy or Germany in this, what we say, Smart Power, we are actually #1. So we have certain area where we are extremely strong. One of the areas where our competitors has been or one competitor being stronger is in North America. And maybe you remember that for a number of years, we bought Thomas & Betts because we said we needed to get access to the distribution network. Maybe that was not the perfect distribution network that we needed. So now when the GEIS acquisition was made, this was the perfect fit for ABB. And I really believe so. This was an underinvested business from GE, but with a very strong distribution network in the market. So what Tarak and his team is doing is to look over this business, split it up into Smart Power, smart building and distribution solution and to make sure that the footprint is effective, that is actually taking our 26 production units and to make sure that the technology, which is really the top when it comes to switching gear and switching equipment to be put in the switching gear from the U.S. and to build up a really strong portfolio based on the knowledge and the technology that we have in the group. And I actually met the distributors in U.S., and they are really excited about both the change in the footprint, but also the portfolio program that is being introduced at the moment. And that will help us to get to profitability. And you know Tarak, he said we're going to reach the 15% not too long future. And that is, of course, the target. And when we manage to get this total business up over 15%, we're going to generate enormously a lot of value in ABB. When they come up over 15%, we will be driving growth. We can grow before, but we will be driving growth in our strategy, that might -- where we make some smaller or some more acquisitions to grow forward. I think this is a typical example how we focus on stability, profitability and then growth. So we have numerous of these growth examples in the business, and then we have some of our businesses maybe that has not managed as good as they should. And that is what we need to look into. Is it a management problem? Or is it something else that we need to address?

And we'll take a question now from Simon Toennessen of Jefferies.

I guess I'm going to try to get an answer from you, sort of what Gael just tried on the Industrial Automation. When we speak to a lot of industry experts, and I guess there's a discussion in the sector for a while around the digital transformation and a lot of experts think that during the crisis that we're seeing, this will accelerate a lot further even to what we've seen in the past few years. What are you saying to critics that say your growth underperformance in industrial automation could potentially even accelerate if you choose growth over -- sorry, margins over growth, particularly on the inorganic side in the next medium term? And maybe you could highlight as well how you see the partnership with Dassault Systémes as well that you have -- you might have had a look into this already because Dassault has obviously historically been more of a discrete automation play in auto and aerospace. So you -- I guess you still lack a partner on the process side, in particular, if you choose not to buy a company in that space.

Yes. First, I would like to say, industrial automation consists out of these 5 divisions, which are very different, and they've been operating this. You have one which is targeting the energy sector, which is the oil and gas industry, but it's also the traditional industry. There are certain parts where we have a really strong performance. And there are certain part where we are not market leaders. We're a process industry, as I mentioned before and the solution, then the automation solution that we are offering to that businesses is where the strongest areas. Where we are is actually in the mining and process and paper. Then there are other segments where we are not as strong as in these two. Then you have the marine and the harbor, which is a super exciting part. We are, of course, not targeting the whole marine market. We are targeting a niche of that part, which is cruising ships. It is these LNG carriers where they need these Azipods and this automation and also moving more over to electrical drive systems. We have so many products that are not only coming from industrial automation, but also is coming from Motion and Electrification that are being put into the solution. Those margin is actually being captured in the original divisions and not in industrial automation. So sometimes, it gives a little bit of a difference. Then you have turbocharging, which is, of course, a different businesses, which addresses a lot of gas and also combustion engines where they actually get better productivity out of them. A lot of service, a lot of different businesses, but, of course, varies a lot between the partner. Did I miss anyone?

No, I think you -- yes.

I think I got them all. So they are all different. And then we have strength in the different parts. So before we say that we are losing market share or we are not good, or we don't have the right portfolio, it is important what we compete with because many of our competitors, which are in this industrial automation have other product portfolios, which they are selling in their market with different margins. So I think it's fair to these businesses to take a deep look into them. And we promise you to be more transparent and to give you this opportunity to learn more about the businesses and how we can improve both margins and sales within these businesses. So bear with us, and I can promise you, you will get to know more about it.

Thank you for that. And we are coming towards the end of a long session here today. And Thank you all for your patience, and we will now take the last question from Andre Kukhnin of Crédit Suisse.

I wanted to ask about the operating model and just dig a little bit deeper beyond the 18, what would be called divisions. What are the structures sub those levels, given that, as you said, some of them are actually very large businesses? And where will we, P&L, balance sheet, cash flow, responsibilities or autonomy like below those lines? And somewhat related to that, on kind of leadership fulfillment in the 18 divisions and below that, do you think you're at the place where you want to be? And if not, how quickly can you get there?

Yes. So thanks, Andre. Timo here. Why don't I start with the question on the sort of financial model. So our target is -- or the model we'll be at the end of this year, we will be there hopefully a little earlier where we have all the assets and cash flow on the division level, but we will not push assets further down on assets like realist and other fixed assets. So we will be able to measure full P&L and also full return on capital employed on division level. Thereafter, when we go 1 level lower, for example, if we call it product group, which is usually the terminology, what we use, we will focus then on margin. And in the product business, gross margin without allocation is a very good indication if the business is moving to the right direction. And then in a project business, it is more following the contribution margin where you also have the project-specific fixed cost included. So that is the way we are going to run model. But of course, if we see then that divisions see value on measuring something else for their purposes, we will allow them to do that. But of course, they will then have to cover such investment as well.

When it comes to the management of these divisions, if they are capable or -- to run, and there are these large businesses. Many of them have been in the position there for a long time. Some of them are newly in place. I think this will be the first time they will be in the limelight in the group, meaning that they are fully accountable, not distributed apart, which means that it will be their decisions close to the customer, which will drive performance. And of course, this is one of the area which the business area heads, the 4, will look at their businesses and say, which are up to running these positions or where do we need to make changes. It's like any business. We need to have good people in place, good management that will drive value going forward. And I have a long experience from this. And it's -- to be honest, these 18 management team or these 18 division presidents are the most important people in ABB. Thank you.

So thank you very much, everybody, for joining us. It's been a pleasure having you with us today. And as always, Investor Relations is available for any follow-up. And I'm going to just hand over to Björn now to end the session. Thank you.

Thank you very much. I think it's been exciting today. I've had a good opportunity to meet all of you in this way. As I said, I would love to have you all here, and we could do much more interaction and talk in the future. But we will be meeting soon in the Capital Market Day. We will come a little bit further by that time, and will be more where we're talking about how do we make our businesses successful and how we're going to create value going forward. We appreciate very much that you have a strong interest in our business, and we hope that we can make you happy and create a lot of shareholder value besides making sure our customers are happy going forward. So from me, from Timo, from Jess and from John and from the rest of the ABB team, thank you very much for joining today.

Thank you.