ABB Ltd (ABBN) Earnings Call Transcript & Summary

Greetings, and welcome to this presentation of ABB's second quarter results. You will hear from our CEO, Morten ; and our CFO, Christian Nilsson. And they will talk through results as per usual tradition. And after this, we will run through the Q&A session. I'm Ann-Sofie Nordh, Head of Investor Relations. And with that, I will just simply hand over to you, Morten, for the presentation.

Thanks, Sofie. So let's talk through the building blocks that resulted in another record quarter for both orders and revenues. Good earnings growth, a solid margin improvement and good cash flow. In total, things progressed more or less as planned. We delivered on our guidance, so I'm pleased with the results. But I want to start with M&A. You have heard me talk about the teams being active on a good target pipeline. Now we see these efforts result in 3 recently announced acquisitions, which combined would add approximately 3.5% to our 2025 revenues. This includes 2 smaller deals, one being in the Italian company, Specialtrasfo, who is specialized in medium voltage transformers. I want to make it clear that we're not going back into the general power transformer business. Now these are custom engineered components aimed at industrial and energy applications. It fits well in the Motion High Power division as they can integrate these transformers with our large motors and drives into fully optimized powertrain solutions. The other small deal is in the Marine and Ports division in the business area Automation. Their acquisition of the marine automation specialist, Hoglund, is a nice complement to our existing offering. Hoglund's integrated automation system handles automation, monitoring and control tasks on board of ships. By combining data from engines, power generators and cargo systems, it helps improve safety, energy efficiency and overall operational performance. This will further strengthen our already leading position in marine. And this morning, we also announced a larger deal, namely our offer to acquire Rotork. We have followed Rotork from a distance for a long while, impressed by their technology. They are a leading manufacturer of actuators and would expand our automation offering. And importantly, timing is good as ABB is in good shape. We have improved governance and performance of our own company. We are ready to welcome Rotork into ABB. This is an important step to expand the ABB automation offering. It broadens our scope in what we call the Sense Control Act automation loop. We can take these solutions into our extensive market reach and build on our digital and technology capabilities. We see a strong strategic fit between Rotork and the ABB purpose, and our leading position in the electrification and automation. This deal will bring together 2 businesses with highly complementary technology portfolios and similar customer relationships, geographic footprints and strong installed bases. Beyond the strategic fit, we see Rotork's culture and operating philosophy similar to ours. Last year, they generated revenues of GBP 777 million and a high adjusted operating margin of 24.6%. Absorbing this into the ABB result for 2025, our revenues would increase by about 3% and operational EBITA margin would improve by about 20 basis points. This acquisition would be accretive to our earnings per share in year 2, as the first year is burdened by certain acquisition-related costs. We have agreed on a price of GBP 503 per Rotork share. In U.S. dollar terms, this comes to about $5.5 billion or in 2025 multiple terms, an EV to sales of about 5.3 and EV to EBITDA of about 19.5%. This represent a discount in the region of 5% to 25% versus our own multiples. And accounting for synergies, the EV-to-EBITDA multiple reduces in the mid-teens range. From a timing perspective, we expect the transaction to close in the first half of 2027, post Rotork shareholder vote and customary regulatory approvals. It is our strong view that Rotork joining ABB adds long-term value across the stakeholder groups. The Rotork Board is aligned on the strategic fit, and it is supportive and recommends the offer. But what do we actually mean when we talk about the Sense Control Act automation loop. I would say that automation is about closing feedback control loops. You are sensing a condition, you take algorithmic decisions in controllers, which triggers an act in, for example, a motor and drive running a fan pump or compressor. First, there is sensing. The sensor feed process signals into the automation system. These are signals of pressure, temperature, flow or level or the chemical composition of gases and liquids. The automation system controls monitors and optimize the continuous production processes. This can be in a pulp and paper plant or on an oil platform. The system uses the sensor signals to infer a processed state to analyze deviations and to calculate corrective actions. This takes us to the act phase. The DCS signals the activators with triggers, for example, a well to optimize how much is open in order to adjust the pressure or flow or liquid or gas. Our position within the automation loop has this far been biased towards the DCS and sensing. Rotork is a leading independent manufacturer of activators with a particularly strong position in electric actuators. By adding this to our portfolio, we would improve our offering into the act phase and further strengthen our competitive position. As part of the automation extended platform, it will enhance our ability to help our customers through increasingly digital, connected and autonomous solutions across energy and process industries. There are, of course, different types of activators and Rotork is a leading player across electric, pneumatics and hydraulic actuation. Electric activators represent more than half of Rotork's sales. From a customer perspective, this come with the benefit of consuming energy only when performing work. This reduces operational costs and improves energy efficiency. They also provide highly accurate positioning and motion control. This is essential for applications requiring multiple points of positioning or precise adjustments. Rotork will be a really strong match, extending our current offering. And in the combined setup, we are better balanced in the sense control automation loop. As I mentioned earlier, we have followed Rotork for a long time. They have many qualities as the plan is that they will operate as a separate division within the automation business area, adding about 12% to revenues. By running them as a separate division, we would retain accountability and operational focus, very much in line with the ABB Way operating model. And automation products is a profitable business, so our mix improves. In the combined setup, the business area operational EBITA margin would have been 15.2%, 120 basis points higher than reported 2025 actuals. We are very hopeful about what we and Rotork can jointly accomplish. Together, we will be a strong partner to customers as we move towards increasingly digital, connected and autonomous solutions across energy and process industries. Now let's turn back to Q2, and we delivered new record levels for both orders and revenues. In the order chart, you see that this is the first time we generated about $12 billion in 1 quarter. The very strong comparable increase of 28% is driven by a broad and good activity across most of our customer segments. And notably, the automation business area even tempered overall order growth for the group. Importantly, their market environment remains strong. So their order decline is linked to the very tough comparable. Christian will talk more about this shortly. But speaking of strong markets, we had surging order growth of 58% in electrification and a very strong 20% in motion. In total, the elevator pitch would be that all of our 3 business areas continue to see a robust overall market situation, and we don't see a pattern of prebuys, but demand is rather unpinned by sustained customer investments across the secular megatrends of energy expansion, energy efficiency and energy resilience. Areas where ABB's portfolio is very well positioned to deliver. Looking closer at the different customer segments, data center stands out with a triple-digit order increase. We had a challenging comparable in the utility segment, but the market is strong with investments in grid build-out, stability and reliability. We also see good demand for upgrades and electrical infrastructure in, for example, tunnels and airports. And linked to transport, marine and rail continue to be strong areas. In the building segments, orders were up in the commercial area, including for HVAC. In the quarter, we got yet another proof point of what we can accomplish with the combined strength of our business areas, the power of ABB. Under the extended partnership with VolterGrid, Motion and Automation will supply synchronous condensers with the associated prefabricated e-house units. These are systems that act as critical stabilization assets enabling the voltage stability required by next-generation AI chips, well done by the joint team. As I mentioned, revenues were the highest on record at $9.5 billion up in the second quarter. You can see in the chart that revenues tend to be sequentially up in the second quarter. But this year, the uptick was larger than usual, in line with our guidance. Revenues increased in both the project and short-cycle businesses and higher volumes was the biggest contributor to the strong comparable growth of 12%. This includes a good pricing contribution of close to 2% with the team's balancing customer relationships and depending on our own profitability. As a net total, we delivered a positive book-to-bill of 1.27, and it was positive in all 3 business areas. The backlog is up at a record level of $30 billion, up 28% on a comparable basis. In my view, we performed very well in a strong market. Looking at the different geographies. Orders were up by double digits in all 3 regions. The Americas continue to be the strongest growth driver and orders increased by 52% like-for-like. Looking specifically at the U.S., orders were up by as much as 62%. This high number includes some large bookings, but also base orders were very strong and improved by about 30%. Europe was up by 12%, and Here, we saw a decline in the largest market, Germany, but this was more than offset by order improvements in several of the other large countries. Asia, Middle East, Africa improved by 12%, with China being up 10%. Let's turn to earnings, which reflects both favorable market conditions and a strong execution. We converted a 12% comparable revenue growth to a 20% increase in operational EBITA to $1.9 billion. This reflects a margin improvement of 90 basis points to 20.2%. Similar to the prior quarter, we had pressure on gross margin. It dropped by 50 basis points from last year, impacted mainly by unrealized derivatives on FX and commodities. But we also still have a bit of a gap on the price/cost balance. That said, we did achieve a gross margin of 40%, which admittedly is a good level. The impact from the unrealized derivative feeds through to income from operations or EBIT, and we had about $130 million of special nonoperational items, partially offsetting a strong business performance. In total, we improved income from operation as well as earnings per share by 8%. With that, I hand over to you, Christian.

Thanks, Morten. So let's take a look at what happened in different business areas. As usual, we start with electrification, which delivered new record highs across virtually all the headline numbers. Comparable orders were up by as much as 58% and the absolute intake advanced from an already strong trajectory and for the first time, hit the plus $7 billion mark. This is underpinned by strong broad-based sentiment across major customer segments. I actually noted that this was the sixth consecutive quarters with a positive book-to-bill in Electrification. In Q2, it was 1.39, and the order backlog increased by 59% to $13.7 billion. Looking at the different segments. Data center stood out again with a triple-digit order growth. Still, we see a solid project pipeline with data centers requiring increasingly more electrification content. The market is clearly very supportive, and we are performing well in this strong market. But there are very good developments also in the other markets. If we exclude data center segment, electrification orders still increased by double digits. One segment to highlight is land-based infrastructure. This is driven by modernizing electrical infrastructure for tunnels, roads or rail. Demand in the Building segment also improved, driven by commercial activity. The Utility segment is another strong market. Although in this particular quarter, the order growth was limited due to last year's high comparable. Now turning to revenues, which amounted to $5.2 billion on a comparable growth of 19%. This was driven by good progress in both the short cycle and project business. Higher volumes was clearly the main driver. But the team did well also on price management, which added about 2%. And it was encouraging to see the sequential acceleration in pricing in the second quarter. We still have a bit of a gap in price versus input cost to cover in gross margin. And here, we expect to be at least neutral for the full year. But in the second quarter, this gap was more than compensated for by efficiency improvements and stringent SG&A control. As a net total, the operational EBITDA was up by 26% to $1.3 billion. This reflects a margin of 24.9%, yet another record high from the electrification team. Looking at the third quarter, we expect comparable revenue growth to be at least similar to what we saw in Q2. And operational EBITDA margin should improve from the second quarter level of 24.9%. Now let's turn to motion. Contrary to the usual seasonal trend, orders actually increased sequentially and reached $2.6 billion. This reflects a comparable growth of 20% from last year. driven by improvements in both short cycle and project business. As Morten mentioned earlier, we see a good demand for our grid stabilization technologies with our industry-leading synchronous condensers. Other positive segments were rail, marine and mining. On the more short cycle side, there was strength in HVAC for commercial buildings as well as in data centers cooling. Similar to recent quarters, the softer areas are the process-related segments like chemicals and pulp and paper. Turning now to revenues of $2.2 billion with a comparable revenue growth of 4%, more or less equally driven by volume and price with an additional percentage of growth derived from portfolio changes. As you mentioned coming into the quarter, profitability was under pressure. Operational EBITDA margin dropped by 130 basis points to 18.5%, and there are multiple factors to consider. First, the positive impact by operational leverage on comparable revenue growth. This was, however, more than offset by Argus Electric acquisition operating at a loss and diluted margin by around 70 basis points year-on-year. This is similar to what we saw in Q1, and we expect it to be dilutive for the remainder of this year. Additionally, we still have some operational inefficiencies in our High Power division. This should, however, be resolved during the second half of the year. And lastly, there were some timing impacts in production volumes in the traction division, which had an adverse impact on profitability. The high-level view for motion can be summarized as good orders in a solid market, but some challenges on profitability, which partially will linger throughout the year. Looking at the third quarter, we expect comparable revenue growth in the mid- to high single-digit range year-on-year. And operational EBITDA margin should be similar to the second quarter. Now let's turn to automation where orders remained sequentially stable on the level of $2.5 billion. These orders actually make it one of their strongest quarters but still recorded a year-on-year decline of 14%. This is due to last year's high comparable, which includes a very large single booking of $600 million. You can see it in the chart on the left-hand side. But let's take a look at order drivers. Demand for Marine as well as port automation and electrification continues to be strong. Overall, our performance in oil and gas remained solid, with any disruptions linked to the Middle East conflict contained to the local markets. Similar to what we see in motion, the softer demand is noted in the process-related industries of pulp and paper and chemicals. And we still see a muted CapEx environment in the mining segment. Revenues came through slightly better than expected, with comparable growth of 7%. Overall, we generated revenues of $2.2 billion, but it came with somewhat of an adverse mix. The higher share of revenues from the project and system integration business had a slight negative impact on gross margin. But still, the team improved operational EBITDA margin by 120 basis points to 15.4%. And supported by stringent cost control, not leased in SG&A. I should also mention that in the quarter, we had about 70 basis points of margin support from a one-timer. This stems from a provision release linked to a project settlement. But overall, another solid delivery from the automation team. Now looking at the third quarter, we expect comparable revenues to improve in the mid-single-digit range. And operational EBITDA margin should improve year-on-year. Cash was another solid point in our results. As noticeable in the chart, we didn't have the usual pattern of sequentially higher free cash flows. As you may recall, the first quarter was boosted by about $425 million from a real estate sale. But on a year-on-year basis, we improved slightly to $881 million. This was backed by good operational earnings increase, which offset the impact from higher CapEx spend in continuing operations as well as a lower cash flow in discontinued operations. But all in all, it's a good cash quarter. And we are well on track to improve our free cash flow from last year's strong level of $4.6 billion. And with that, I hand it back to you, Morten.

Thanks, Christian. So let's finish off with the outlook. As evident in our Q2 results, we play in strong markets. Order backlog is rising and the short-cycle business is clearly supportive. We raised our growth guidance for the year to a low double-digit to low teens increase in comparable revenues. This adds confidence to our current margin outlook which is to improve from last year, even when excluding the real estate gain in the first quarter of 2026. For the third quarter, we expect the low to mid-teens growth in comparable revenues year-on-year and the operational EBITA margin should show sequential improvement from the second quarter. So now on [indiscernible] Let's open up for questions.

[Operator Instructions] And with that, let's take the first question, and it comes from Martin Wilke at Citi.

So the question is on electrification order. It's obviously a phenomenally strong quarter even after a couple of very strong quarters beforehand. I mean you said there's no prebuy. But I guess what everyone is trying to work out is whether lead times are extending and this is reflecting deliveries and build-out further out into 2028 and beyond? Or whether this is sort of a near-term driver that's going to get put into the ground in 2027. So just understanding a little bit more about how you see the sort of duration of the backlog that you're building and what it means for demand strength for the overall industry. So is this lead time related? Or is this really true underlying strength in higher and higher build-outs for your customers?

I can take that. We see the strong growth here in all sectors. And it is -- the lead times the same or similar to what they have been before. So we don't see any prebuys. We don't see really any change from a lead time perspective. It's more that we're getting more capacity online. That means also we can take more orders on our side. And you see that also reflected in our increased revenue guidance, both for the year, or for the quarter now and the year. So that's really the driving factor behind it. Just high activity level and good demand in the market.

Thanks, Morten. And then Magnus from Nordea, are you with us Magnus?

Martin Christian Antares from Nordea. Staying on the same topic, I think Christian talked about double-digit growth ex data centers and order intake in Q2. I think we were slightly higher than that maybe teens or so in Q1. Could you frame a little bit if the order growth ex data center is moderated in the quarter?

Yes. I mean if you

No. The double-digit growth outside the data center is definitely here in Q2, and it's a similar pattern that we saw in Q1. So let's say, the continuation of good performance both in Q1 and now as we see it in Q2 outside data centers.

I could add to that.

No, no moderation.

Yes. I could add to that also in electrification, specifically in this quarter, we had a very high comp in the utility segment, which didn't support order growth for that reason. So otherwise, all good. And then we have a question here from the online tool. It comes from Benjamin Helen. Could you provide more some color on pricing trends across electrification and automation. Are there differences by geography?

Now we see for this quarter, about 2% increase in price, so up from the Q1. That's also what we talked about after the first quarter. And we also said that we will, because we need some time to get that full compensation of the cost increases we saw earlier in the year, there is a bit of a lag, and that's what we are executing on and according to that plan. So that is still valid, as we said earlier, that it will be more than compensated on cost by the end of the year. There, of course, there are differences here in the short cycle versus the long cycle. The long-cycle business, you can also do more of hedging when it comes to material and long and fixed contract. Of course, the short cycle, you cannot do that. So there's where you need to be quicker when it comes to adopting more dynamic in pricing. So we see that more, as I say, on the short-cycle business where you need to do faster updates. Then on geographies, of course, the strongest, let's say, in where we have more of inflation is in the Americas where we see also the strongest growth. So there is where you have more price effects than, for instance, what we see in China, but also the price decline that we saw earlier, at least a year back in China, that has reversed. So that is also what gives a positive impact on pricing when we're talking about the average. But of course, that difference is still there between the higher price increase markets talking U.S. versus China, but the delta has now been lifted on both sides.

And maybe Europe, we can add kind of in the middle of between the 2, I guess, it's fair to say.

Thank you. And then we take -- move to the conference call, and we take the question from Andre at UBS, please.

Can we just talk about Rotork acquisition? And could you comment on what kind of drove the decision to pull through at this stage rather than any sort of point of time, and I think the last 10 years that we've talked about it on and off. And just one specific angle on that. In terms of customer fit. From what I understand, Rotork obviously very petrochemical oil and gas exposed, but your DCS most natural there is a strength rather in other mining and pulp and paper, water wastewater rather than the hydrocarbons. So could you talk about how you can synergize these 2 across the time?

Yes. No, we looked at Rotork for quite some time and been impressed about the performance. And what we really like is the leadership in technology and on market leadership, that are 2 aspects that we like, and it's a good fit with the electrification and automation focus from ABB. And also it's very similar to Rotork. And if you look at end user and end customer exposure, we also see a very good overlap. It adds -- I mean 40% of the business of Rotork is oil and gas. So that would add -- if you're looking at an ABB overall, it's at 0.5% more oil and gas exposure to over existing ABB business. So we see rather this complementing and being able to connect the sensing and the control through our distribution our distributor control system, our leadership there and then the activators with really the act part coming from automation system. So combining these 2, we believe, is a great fit for end customers and end users. It gives a better service expansion opportunities also for Rotork when they have a wider ABB network to help. So that is where we believe there is good, both revenue and cost synergies between us to be able to create that value that we are confident that we will have getting Rotork into ABB. So we are looking forward to that new opportunity.

And I'm going to...

Why now? I was just the beginning of the question of why now?

I think here, maybe more the timing is from an ABB side. We are running as a strong performing company. We have good governance model in our ABB Way is well established, and we believe it's the right time also to take in some bigger assets or bigger parts into the company. So our -- this will benefit over automation business. It will benefit the overall ABB business. So we believe now is a good time.

And I'm going to tie on to that with a question on Rotork from the online tool from Delphine, which says what assumption do you have on the midterm revenue growth for Rotork?

Well, I will not comment on the outlook. I think that is something that they have to do as they are still a separate company. So I will leave that with them. And I'm sure there are opportunities to ask that question also.

Good move. We'll take another call from the conference call line. We'll open up for Will Mackie at Kepler, please.

I wanted to come back to the data center end market segment. And touch on, I'm sure, a subject on everyone's mind, which is the continuity of order intake that you've achieved this year. Do you talk about a positive price level and a positive pipeline going ahead. But could you comment broadly on how you see that pipeline maturing into orders in Q3 and Q4? And do you see the current levels of demand that you've just booked sustainable going into the next couple of quarters?

Yes. Thanks. We have -- kind of we have had seen a very strong comparable growth, of course, coming into these quarters for the electrification business reaching the first time about $5 billion in Q4, first time about $6 billion in Q1, and now the first time about $7 billion. Continue always making records in business. I haven't seen that happening kind of always happen. So we should kind of be a bit also aware, of course, of that one. But in general, we see a very strong pipeline also when we're talking about our large customers in this field. So the capital allocation and the investment plans are clearly there. It's our ability, of course, then to -- we don't take orders that we cannot commit to the right execution date. And that's why -- but we see have a strong and a positive outlook also when you look at the future for the data center sector, but I think we should also recognize there will be kind of variation in the order intake. We -- you may remember every one of the Q1 last year where we had kind of less of bookings, a large order in that quarter then now we had some very good quarters behind us. But in general, we're looking at a strong demand and also a good outlook for the data centers. But I cannot promise you that we will continue to make that kind of records that we've done every quarter now. So you will see some variation in the order intake in the -- but the longer-term outlook is still is very strong.

Thanks. And then we have next in line, Max from Morgan Stanley.

Just my question is just around the electrification revenues and your capacity. So if orders are running at this sort of $6.5 billion to $7 billion level and we end up, let's say, at $27 billion of orders plus. I'm just trying to understand kind of how quickly that can convert into revenues and kind of how much capacity you have? Because I guess if I look at your sort of sales this year, they're going to be, say, $21 billion. And if we think about kind of a lot of this capacity or a lot of these orders being for delivery in my interpretation would be that there'd be no reason that the growth should slow down, we should be landing at somewhere around $25 billion. I guess I'm just trying to understand how quickly and how high can revenues get up to next year? And can we see kind of $25 billion, $26 billion? Is that realistic with the capacity that you have?

You're quite early here, Max, when it comes to talking about '27 already. So -- and we will get there in January, more of guidance for the for the '27.

But what I -- but you have the backlog, you're kind of locked in for a lot of it, I guess.

Yes. True and what we will see is more kind of also the short-cycle business, the book-to-bill is where we will see how then how the total turns out. What I can't talk about is kind of the capacity build out. You know that we have, over time, invested and increased our CapEx now for many years. It's investments in United States investments in China, in India. We also announced in this quarter, $200 million expansion and additional CapEx into Europe because we see we talk now a lot about United States and the data center buildout. But as Christian also referred to, we're seeing a strong demand. Also, we have were up 12% in Europe in this quarter, 12% in Asia, Middle East, Africa. So if you're looking at -- we are adding capacity to be able to deal with the higher order backlog that we now have in place. So of course, our -- we -- as I said earlier, we do not orders, we don't are fully committed that we can deliver on time. That is a very important part. It's a lessons learned from the past. And that's one of the things that I think is also helping us winning share seeing as one of the most reliable partners in this space. So the order intake, what we can show today is based on committed capacity that we have in place or are being built and what was -- why we increased the guidance is we see that some of the capacity that is now coming online, based on previous year's investments is giving the expected benefits the expected increased capacity. And this is a continuous job now on expanding more or less every -- especially in electrification, every unit that we have with more square meter, more robotics, more automation and more people online, which needs to be trained. And we are on a good journey there to be able to execute on this and get that order backlog into revenues.

Maybe just one clarification. Do you have any orders in your backlog that extend into '28 already? Or is all of this now still for '27?

No, we have also for '28, especially if you talk about automation business, there you will see many -- the pipeline, for instance, in the cruise segment much being much longer.