Abb Ltd

SIX:ABBN

Earnings Call Transcript

[Ann-Sofie Nordh, executive]

Greetings to you all, and welcome to this presentation of ABB's fourth quarter results. I have our CEO, Morten Wierod; and our CFO, Timo Ihamuotila, here next to me. And I'm Ann-Sofie Nordh, Head of Investor Relations. Martin and Timo will take you through the results presentation, after which we'll open for Q&A.

So with that said, and without further ado, Morten, would you kick it off?

[Morten Wierod, executive]

Thanks, Ann-Sofie, and a warm welcome also from my side. Let's start by taking a look at the full year 2024, which was a new record year for us in many ways. We improved on most of our financial headlines -- sustainability side, one of the highlights was to get over Scope 1, 2 and 3 targets approved by the SBTi.

Taking a high-level markets perspective, I would say it was a continued robust trade environment in 3 out of our 4 business areas. Orders in our short-cycle businesses improved in the mid-single-digit range, which offset the impact from large orders softening from last year's high level. Electrification was the big growth engine. And I think it is fair to say that both Robotics & Discrete Automation as well as E-mobility fared worse than what we originally expected. From here on, these 2 should be less of a drag on group performance.

Despite some of our businesses not yet delivering to their full potential, the operational EBITA was up by 10%. We took another step towards the high end of our margin target range as we achieved a new record level of 18.1%. We did this with strong support from higher gross margin, which reached the all-time high of 37.4%. I'm pleased about the good progress we're making here.

Earnings per share was up by 6%. And I know that Timo is happy about us delivering on our ambition to improve free cash flow. The CHF 3.9 billion corresponds to a free cash flow margin of 12%, making it the second consecutive year at this double-digit level. Cash flow should be good also going forward. Another strong point for us is ROCE at 22.9%. We will become transparent with ROCE, and Timo will talk about that later on.

Towards the end of the year, we also got a better momentum for M&A. Based on the deals we have already announced, but not -- we set ourselves up to approach our long-term target range for acquired growth in 2025. Our strong balance sheet supports more acquisition, and we want to utilize it.

All in all, it was a good year for ABB, and the Board has proposed a dividend increase of [ CHF 0.03 ] to CHF 0.9. The cash distribution is in addition to the CHF 1 billion we have used for share buybacks in 2024. And today, we announced a new and larger program of up to CHF 1.5 billion, which would start to execute in the early days of February.

To finish off 2024, I want to say that I'm proud of what we have -- as a team, have accomplished. We stay true to our strategy, including the ABB Way model. And we are still making our operations more efficient and transparent as we increase accountability even further down in our organization. We continuously look at how we can optimize our business portfolio, which is positioned at the core of the energy transition as well as energy and automation efficiency. And I look forward to 2025, while I'm confident we will yet again deliver some new records.

So let's now look at the fourth quarter in isolation, which, in my view, represents a good ending to the year. The strong growth in short-cycle orders more than offset a lower level of incoming large orders for which the base was really high. In total, our comparable orders increased by 7%, driven by a stellar performance in Electrification. Robotics & Discrete Automation turned a corner by delivering positive order growth despite an adverse impact from the team having gone back to customers to reconfirm the backlog. Timo will talk through the details on the RI slide later on. But without these -- bookings, our group orders would have been 2 percentage points higher.

Looking at the income statement, you see that we improved on virtually all lines. The 5% comparable revenue growth was mainly driven by higher volume, but also by positive pricing of about 1%. This generated a good drop-through to operational EBITA, driven by a higher gross margin. I'll come back to that on the earnings slide.

Some of you may remember that I mentioned our brand positioning. We have now launched our new tagline: Engineered to Outrun, which I think nicely represents who we are and what we do. We help industries outrun leaner and cleaner. To me, it articulates what we want to be known for in the minds of our customers. This is a long-term project. But assuming we do it right, we show commercial upside from a more focused industrial positioning. And again, this does not mean a higher spend. We will simply be more focused.

At the Q3 presentation, I talked about data centers and how we are first in the market with a medium voltage switchgear. There's been a lot of AI-related news flow recently. Our objective is to make data centers more CapEx and energy efficient. And I am sure that this continues to be a focus point for our customers. We invest to innovate to create customer value. We are now receiving orders for the so-called HiPerGuard medium voltage UPS system. This brings ever better UPS solutions when the server power rack requirements goes up. This means that we also can help customers to reduce their CapEx spend by up to 30%, reduce complexity and become a more energy efficient in their next generation of data centers' design. I look forward to follow the team's progress in this area.

As you can see here in the chart to the left, the pattern suggests a softer order intake towards the end of the year, and book-to-bill tends to be negative in our fourth quarters. So also, this year at 0.94. In my view, it was a solid order quarter, which adds to my confidence for a positive book-to-bill for the full year of 2025. It was good to see that despite the second highest base ever for large order, we managed to deliver comparable order growth of 7% to $8.1 billion. This was driven by a strong growth in our short-cycle businesses. We've delivered a low double-digit improvement from last year. It improved in 3 out of 4 business areas with Electrification being the outperformer. The short version is that the trading environment remained robust in most customer segments, except for weakness linked to discrete automation and the E-mobility businesses.

Looking a bit deeper into the details, both data centers and utilities stand out on the strong side. Order growth was good also with the building segment as the persistent weakness in China was more than offset by other regions. Automotive is still a challenge for our Robotics business. But this quarter, it was actually a positive on orders. Transport and infrastructure are generally solid, although marine and rail were down due to -- of large orders.

If we now switch to the revenue chart, the CHF 8.6 billion we delivered was supported by backlog execution as well as conversion of recent uptick in short-cycle orders. Notably, the CHF 8.6 billion is the highest quarter level ever from ABB and it was up by 5% on a comparable basis with a positive development in 3 out of our 4 business areas.

Now looking at the regional orders, we were up in all 3 regions. China continues to be a challenge in several customer segments. But the negative 11% you see stated on this slide is impacted by the backlog adjustments in Robotics & Discrete Automation. Excluding this, China is down by the more limited 1%. But as total, Asia, Middle East, Africa was up by 4%, with weakness in China, offset by strength elsewhere in the region.

The Americas improved by 7% and continues to be the most robust area driven by the U.S., where, however, quarterly growth was limited to 1% due to last year's high base. Europe was up by 9%, with a strong improvement in many of the larger markets, including Germany, although from a low level.

The seasonal pattern is visible also in the earnings and margin chart. But importantly, it shows that we continue to improve performance. We are making further progress on the gross margin. The 35.5% is up by 100 basis points from last year. And we offset the intentionally higher R&D spend, while they managed to keep SG&A more or less stable. The underlying corporate and other costs of about CHF 60 million were slightly lower than the CHF 75 million we had expected as we benefited from a settlement in a noncore project.

Operational EBITA was up by 8% and we improved the margin by 40 basis points to 16.7%. This means that we delivered the highest fourth quarter margin on record. And as I mentioned earlier, we achieved a new all-time high for 2024 as a whole. The way I see it, we are in a good position to nudge the margin north also in 2025.

Now I'll hand over to you to Timo to give you some more color on the different business areas.

[Timo Ihamuotila, executive]

Thanks, Morten, and welcome to you all from my side as well. And we start with Electrification where comparable orders were up by as much as 16%. The quality of this order growth was, in my view, underpinned by the fact that we had improvements across most of the divisions as well as across regions. Data centers and utilities continues to be strong areas. But the building segment also contributed in a good way where we, on the commercial side, saw good momentum in both the U.S. and Europe. In the residential area, it was broadly stable at low levels, outside of China, which is persistently weak for both residential and commercial.

Now if you look at the chart in the middle, you'll see that the Electrification achieved another milestone. With the 11% comparable revenue growth, they for the first time surpassed quarterly revenues of more than $4 billion. All divisions contributed with higher revenues, which came primarily from higher volumes with some additional support from pricing. The outcome was even a bit better than our expectations on the back of higher project deliveries.

Electrification improved operational EBITA by 19% to CHF 863 million, resulting in a margin of 21.3%. The gains from higher volumes and price more than offset higher expenses mainly related to R&D, but also for SG&A as well as the stronger-than-expected adverse revenue mix towards project business.

Looking into the first quarter, we currently expect a mid- to high single-digit growth rate in comparable revenues and the operational EBITA margin to remain broadly stable or slightly increased from last year.

Let's then flip to Motion, where orders remained around the CHF 1.9 billion level, down 3% on a comparable basis. The short-cycle orders improved, but this was offset by lower project and system-related orders where the comparable was one of the highest ever. In commercial buildings, HVAC as well as in water and wastewater and power generation. The softer areas included the process-related segments of oil and gas, chemicals and food and beverage. Rail also declined, but this was mainly linked to the large order comparable I just mentioned.

In the revenue chart, you see that Motion comparable revenues was up by 6%, resulting in a record quarter for Motion for the first time above CHF 2 billion. Most divisions saw positive developments supported mainly by strong backlog execution, resulting in higher volumes, but also by some positive pricing. The higher volumes as well as operational improvements contributed to a strong margin improvement of 210 basis points to 18.7%.

I should mention that the part of the improvement relates to the onetime product quality costs, which weighted on last year's margin by approximately 60 basis points. But importantly, the higher profitability is more an outcome of benefits from higher comparable revenues and efficiencies, which clearly offset the higher spend in R&D and SG&A. For the first quarter, we anticipate a mid- to high single-digit comparable revenue growth and the operational EBITA margin to slightly improve year-on-year.

Turning now to Slide 11 and Process Automation, where the market environment is solid. Total orders remained broadly stable despite the tough large order base. This resulted in PA continuing their streak of positive book-to-bill for now 17th straight quarter. The underlying trading environment is still robust in the marine and port segment, although this time, quarterly orders declined due to a large CHF 150 million booking last year. A stable to positive order development was noted in most of the energy and process industry related segments with weakness noted primarily in chemicals.

Process Automation improved comparable revenues by 4% due mainly to execution of the large order backlog, which added support from pricing in the product business and good service growth. The backlog execution comes through at the higher gross margin. This helped driving operational EBITA up by 8 percentage points from last year with a 40 basis points margin improvement to 14.4%. Looking at our expectations for the first quarter, we foresee comparable revenues to improve in the mid-single-digit range and the operational EBITA margin to be broadly stable year-on-year.

Now we turn to Robotics & Discrete Automation where orders turned to positive growth after 8 consecutive quarters in decline. It has been an unusually turbulent time for [ IRA ] when markets have corrected after a significant prebuy period. We have now completed a thorough analysis of the backlog, which included going back to customers to reconfirm status. This triggered debookings of about CHF 130 million in what is now a reconfirmed order book. The majority of the impact was linked to machine automation and China and reduced the business area's comparable order growth by 24%.

With that said, excluding the debookings, the strong year-on-year order growth could appear as a very big improvement in the underlying demand. I would comment that it is more linked to last year's very low base as we have not seen a big change in the market environment versus what we saw in the third quarter in either of the divisions.

So looking beyond the backlog adjustment, the Robotics division saw positive order development in the automotive sector. The segment remains challenging, but in this quarter, we benefited from ramp-ups in hybrids as well as by some replacement CapEx. Other positives were the areas of general industry and food and beverage, while electronics and metals were muted.

In Machine Automation, customers remain focused on inventory management, and we stick to our earlier prediction that this will ease to the end of the first quarter or at latest during Q2. But we expect a slight sequential order increase in both divisions in the first quarter of 2025 when excluding the backlog correction we have just talked about.

Moving now to revenues. The Robotics division executed on their backlog, resulting in a low double-digit growth rate for comparable revenues. This was, however, clearly offset by significantly lower volumes in Machine Automation. The previously announced cost savings measures in Machine Automation is increasingly coming through but did not compensate for the lower production volumes. So while Robotics delivered a double-digit margin, the total operational EBITA almost half with the margin at 7.9%.

For RA, in the first quarter, we expect the absolute revenues and operational EBITA margin to remain broadly stable versus Q4. We ended the year by delivering free cash flow of $1.3 billion in the fourth quarter. This, in combination with the strong cash generation from the first 9 months, resulted in the annual free cash flow of $3.9 billion, meaning we delivered on our ambition to step up from last year. As Morten mentioned, cash flow should be good also in 2025 and I see it being in the similar to '24 level.

Looking at the fourth quarter in separation, the free cash flow decreased by approximately $420 million. The improvement in operational performance was offset by less reduction in net working capital versus previous year. Net working market capital management has been an area of strong internal focus this year and I was very pleased to see that we were able to bring the net working capital as a percentage of revenues down to 8.6%. This actually is in line with where we were prior to the supply chain crisis, a job really well done by the team.

Taking a look at the ROCE development. You see in the chart that the 22.9% we reached is again clearly above our target of greater than 18%. ROCE improved by 180 basis points, driven mainly by better operational performance but also by our focus on net working capital. Overall, the improved ROCE is a good indicator that we continue to improve ABB's long-term performance and are really operating at the best-in-class level.

Before I hand back to Morten, I want to mention some reporting changes that will come into effect as from Q1. With these changes, we want to more closely align our reporting with our day-to-day operations with the aim to drive operational focus and improvement on our gross margin, net working capital and return on capital employed.

Firstly, we will be reclassifying certain IT costs from gross margin and we'll report them based on the nature of the system rather than by headcount allocation. This will allow us to move more closely to track gross margin and costs directly linked to the business and hold our functions accountable for the cost associated with their infrastructure.

Secondly, to take another step in our efforts on capital efficiency, we are introducing a new measure focused purely on trade net working capital. It means that this KPI will include only trade receivables and payables, contract balance sheets and accrued liabilities. This will be the ratio that we will present as percentage of revenue, and we will use fourth quarter average to smoothen the seasonality of the net working capital, which tends to be front-end loaded in the year.

And lastly, we will better align the ROCE calculation with operations by using the estimated operational tax rate and also, for this KPI, base the calculation on the fourth quarter average to remove seasonality. All restated and new numbers will be on the IR website in February.

And with that, I will hand back over to you, Morten.

[Morten Wierod, executive]

Thanks, Timo. So let's finish off the outlook, and I've already alluded to a positive development in 2025. We acknowledge that there are geopolitical market-related uncertainties. At the moment, the strong U.S. dollar put some pressure on numbers. But from what we see right now, we expect a positive book-to-bill comparable revenue growth in the mid-single-digit range and the operational EBITA margin to improve from last year. For the first quarter, we foresee growth for comparable revenues in the mid-single-digit range and operational EBITA margin to remain broadly stable year-on-year.

So now Ann-Sofie, let's open up for questions.

[Ann-Sofie Nordh, executive]

Yes. Let's do so. [Operator Instructions] With that, it's time for Q&A. But before we take the first question, I just want to let you know that Timo, as you see, will not be able to join us for the Q&A session due to personal reasons. So today, it's you and me, Morten.

[Morten Wierod, executive]

[indiscernible]

[Ann-Sofie Nordh, executive]

Indeed. And with that said, we open up the line for the first question, and it should come from Martin at Citi. Are you with us, Martin?

[Martin Wilkie, analyst]

It's Martin from Citi. The question I had was in inside Electrification and particularly data centers. Obviously, a lot of market debate over the last week or so on the efficiency of beeps and so far. And I realize it's way too early to really sort of determine what's happening with your business there. But just so we can understand a bit more about what's happening in data centers. Your backlog overall in EL is still close to peak. But could you give us some numbers on data centers within that? And also as part of that, have lead times on some of these products that were clearly into supply constrained for a while, is that beginning to normalize? How do we think about the backlog conversion when it comes to some of these products within data centers?

[Morten Wierod, executive]

Well, thanks, Martin. I'll start with that. I mean, the whole data center market, last week, we first talked about the $500 billion investment in IM, machine learning, and then we had DeepSeek on Monday that kind of also stirred the pot, so to say, this week. So it's been -- in a new market like the data center, it is changing. Talking with our customers, our partners the last 2 days, kind of the reconfirmation that the investment plan stands as it was -- from last week, it hasn't changed this week. So that I can confirm on those early discussions.

To give you a bit of the size also of our data center business, we gave -- in 2023, it was [ 12% ] of our order intake in the Electrification. In 2024, it reached 15%. So -- and with good growth on the rest of the business, it shows also what kind of magnitude we are talking here on growth rate. So we see that, that positive development will happen.

I would rather say it's a good thing if we get more energy efficiency into some of the algorithms or in the deep learning model, the large language models that are being used because it would kind of take a bit down, the constraint on -- or reduce some of the bottlenecks that we are facing in this industry when we look to some years ahead.

Our -- as you know, our engagement -- very much on the medium voltage and low voltage switchgear side. This is giving all that infrastructure into data center but also the UPS systems. And as we -- as I already mentioned, today was the good win also that we have more now get traction on medium voltage UPS, that means we're taking equipment out of the more the white space or the data center or inside the data center and to an outside facility, which again reduces the CapEx but also it increases energy efficiency. So I think for us, it's a great win. It's something I'm really proud of what the team has done from an organic. It shows technology leadership from the team.

So we are still confident in the data center market. AI will be widely deployed, and more data centers and more investment is needed to be able to support it. And I think the lower, the cost of it, the wider the deployment. So therefore, I'm still very optimistic when I look at the future of data centers.

[Ann-Sofie Nordh, executive]

And if I may add to your sort of comments or question on the sort of lead times related to the data centers. So when I speak to the guys, I mean, let's say, we now have ring at about 35 weeks, which is still higher than what it used to be historically, but it has come down from, let's say, topping out at 50-ish. Yes?

Thanks, Martin. And we take the next question from Alex, please, Virgo.

[Alexander Virgo, analyst]

I wondered if you could just go through a little bit on this margin improvement guidance. So if I think last year, you guided to a slight improvement and delivered 120 basis points. This time around, you're talking about improvements. I think you mentioned nudge on the call a little bit earlier on. If I look at the starting points, you're 100 basis points or so higher on gross margins. You're talking to further pricing tailwinds. You've got Robotics recovery and mid-single-digit organic growth, which means your operating leverage should support decent margins as well. What are the headwinds? What are the mix comments you made, I guess? And I'm just trying to clarify what slight nudge improvement, et cetera, might actually mean.

[Morten Wierod, executive]

Thank you, Alex. Maybe you start Ann-Sofie, yes?

[Ann-Sofie Nordh, executive]

I'll have a go and see where we end. Well, I think just to -- for a bit of sort of starting point, the improvement in '23 to '24 is, to some extent, driven by the corporate costs actually being lower than what we originally guided for, which was about 40 basis points in the 2024 improvement. Now going into 2025, we have the reverse of that. So we come from a lower level of corporate costs, and we're guiding now for 300, which is like a 40 bps headwind just so we have that framed.

And then if we just talk a little bit about the puts and takes here, like you say, we have the comparable revenue growth, which obviously should help us in terms of operational leverage. And then on the other sort of bucket, we have the corporate costs just mentioned. The mix, while ROA should improve, it's still sort of a negative mix on the total with a proportion of revenue stemming from -- hopefully, from a Robotics & Discrete Automation.

And I think in terms of improvement potential, while we still see you -- I think this -- stepping into your tough now, Morten, but we still have improvement potential from the sort of pushing the ABB Way into our organization further but maybe we're coming -- maybe the improvement potential isn't as big as it was. Maybe you want to allude to that, Morten?

[Morten Wierod, executive]

Yes. I mean we -- I always say, as one of my kind of guiding principles to everyone is that we never want to go backwards. And therefore, we're always looking for how we can improve. And that goes for every business area. And that kind of gives a starting point. And then you mentioned already some of the operational performance opportunities that we have when you get revenue growth in our type of business. So that's there.

But then we also have as Ann-Sofie referring to a few headwind factors that we also need to take in. But we are looking for a new record performance in 2025 from ABB, up from the 18.1 where we ended in '24. So that's what we are guiding for.

[Ann-Sofie Nordh, executive]

Thanks. And we open up for the next question from Will at Kepler Cheuvreux.

[William Mackie, analyst]

Yes, I'm here.

[Ann-Sofie Nordh, executive]

Yes, very good.

[William Mackie, analyst]

I guess my question would go to the cash flow guidance where you've said it will be similar. I'm just thinking if you can walk through some of the main reasons why it would be similar, given that we should expect good revenue growth, margin expansion and further improvements in the management of operational net working capital. So some of the key levers there with perhaps the exception of CapEx should all point to a much better or further gains in free cash flow performance. So what is it? And if it's CapEx, could you maybe allude on where the invest growth is concentrated?

[Morten Wierod, executive]

Yes. Let me start with this, and Ann-Sofie, you can follow up. It starts with CapEx investments that we are increasing. We did that also in 2024, and it is to secure the growth. This is especially related to our Electrification business and especially to North America, but also to India where we have significant -- these are growth markets, and we're also allocating CapEx to those 2 markets. So that is -- you will see more.

This is not new -- always new investment. These are mostly expansion of existing facilities. And we have quite a long list of facilities that will get 50% or even up to 100% larger footprint, but also more automation, more robotics, more automation on the factory floor of those units so that we can be even more, what we talk about, local for local that we can support that initiative, avoiding any tariffs or any changes in trade that we may face. So this is kind of how we continue to build resiliency and capacity of the business. So that's where the CapEx is taking. So that is part of the question, but -- or the answer to it. Ann-Sofie, maybe you have a couple of more comments as well.

[Ann-Sofie Nordh, executive]

Well, I think you sort of framed it with the sort of CapEx being in the negative bucket. So if we managed to deliver similar to what we had in 2024 or if we manage to bunch it up a little bit, let's wait and see how we go. But ballpark, there.

And now we try the next question from Max at Morgan Stanley. Max, your line should be open.

[Max Yates, analyst]

I guess I just wanted to dig into the Electrification growth a bit. When I look at your kind of commentary on your Electrification growth over the past few quarters, it feels like it's not just data centers and grid bits. I mean you've talked about kind of the non-data center a bit growing double digit. And it feels like, look, construction markets are not fantastic in either residential or commercial is okay, but it feels like your orders are growing at a much faster rate, specifically the construction vertical. So I just wondered, can you talk a little bit about what is driving that? Because it definitely feels like your orders are growing faster than underlying construction demand.

Is this kind of the Electrification of buildings, more power protection is this market share gains? And would you agree with that statement that if kind of billing the markets are growing low to mid-single digit, maybe in commercial, you're growing much faster? So maybe just unpacking some of that would be really helpful.

[Morten Wierod, executive]

Well, thanks. It is, as you say, we are -- the electrification of everything is kind of -- it's a red thread that goes through all geographies, that is Americas, Asia or Europe. So that is happening. That is kind of what is the underlying growth of it. The commercial building is also we see some improvement. The residential still being weak. So we still have kind of upside from more of the traditional industries when they come back.

But you have to remember that a lot of the -- what's happening in industries today, when we're talking about decarbonization, it is about moving then into kind of new equipment, taking a diesel or a gas turbine generator and replacing that with electric propulsion. These are where electrification is needed. It benefits our motion business and our process automation, but also for everything of these applications, you need electric switchgear, electric devices, that is -- because none -- no electric motor is able to turn without the power, without electricity, the connection point and all of that comes from switchgear and the Electrification business. So that is kind of an underlying foundation that everything that's happening in industries.

So this is why you see the electrification trend kind of being now more kind of an independent of the pure GDP or general market growth. It is that kicker. So that is what is driving really the performance also of the Electrification business. And then you, of course, have the data center on top as the turbocharger for say, for that business where you take it from 10%, 11% up to 16% in this quarter. So that's kind of the -- how things hang together.

[Ann-Sofie Nordh, executive]

Thank you. And I will cut in with a question here from Matthias on the -- through the online tool also related to Electrification. And he says, is the higher project mix that Electrification margins in Q4 temporary? Or should we expect a sustained shift given the strong project orders?

[Morten Wierod, executive]

For the Q4, this is -- was a special quarter where we had a very strong revenue. It's the first time, more than $4 billion. It was more system versus product balance than what we normally face over the year. So it was an abnormal situation in Q4 versus what we see to the year, but also what we expect for the future. So we should more looking at the year-to-date than the last 3 months in isolation. So -- because there is no kind of change in that business when you look at the different parts of it, but it was more of this mixed picture in the fourth quarter where we have significantly more large project deliveries that went out.

And it was the same also in the Motion business. I'm sure we get that question as well later because we kind of use the excuse, or explanation is probably the right term, where the Q3 numbers, we got questions, why was Motion low in revenues. And now you say, we talked about project delays, you could see now in the numbers in the fourth quarter that revenue really came out also in Motion with -- for the first time ever, about $2 billion in the Motion business. And that was because now some of those delays, we were able to catch up. So good to see that also come through in the revenue numbers on Motion.

[Ann-Sofie Nordh, executive]

Very good. And then we open up the line for James at Redburn. The line should be open. I spoke to James earlier today, and I know we've had some IT issues, and it seems like they continue.

So we put James on hold for now and move to Daniela at Goldman Sachs. Daniela, is your line open?

[James Moore, analyst]

Hello, can you hear me?

[Ann-Sofie Nordh, executive]

Well, we can hear you, James.

[James Moore, analyst]

Sorry, there's a delay from you saying that I can talk to the line being muted. I think that's why you couldn't hear me and some others. .

Ann-Sofie and Morten, could I just clarify, did you mention the percentage order growth number for data center and if you didn't, could you? But my question was on the Robotics and Automation business. When you talk about sort of margin of 8% in the first quarter, roughly flat, does that include any of the savings having already yet to come through? And what is the timing on the savings? And how should that sort of drive, presumably the MA business as a sort of breakeven business? Can we be double digits at the end of the year when those savings come through? I'm just trying to understand the shape and the timing of that.

[Ann-Sofie Nordh, executive]

Yes. No, I think savings all started to come through in the MA business. We started to see it come through more towards the end of the quarter. But given the low volumes they have in their production, that under-absorption is still sort of impacting them. So while the whole of RA business area sort of benefits from the double-digit margin in Robotics, the MA business is still sort of very, very weak. So due to that low volume put through.

We've said that the inventory adjustments among customers should come towards finalization towards the end of Q1, latest during the second quarter. So with that said, we should still see hampered performance in Machine Automation also in Q1, hence, the guidance for -- as a total. I hope that helps.

[Morten Wierod, executive]

And I can add there to your question around data center growth. I think what we have said earlier is we had from 2019 to '24, we had a CAGR of 25% in that segment. And it will, say, in '24 was pulling that number up and not down without going into more detail than that.

[James Moore, analyst]

And when you say that it would have been 10%, 11% without it, and 16% with it and playing around with the share of it, does that mean you're like 30%, 40% in the fourth quarter?

[Morten Wierod, executive]

I think that would be the mathematic calculation.

[Ann-Sofie Nordh, executive]

Okay. Thanks, James. And now we try to put things right again by opening up the line for Daniela.

[Daniela Costa, analyst]

Hopefully, you can hear me. .

[Ann-Sofie Nordh, executive]

We can.

[Daniela Costa, analyst]

Perfect. I have a follow-up in terms of thinking about the Electrification margin for 2025. And if you could help us on what do you see in the backlog in terms of the mix for delivery in '25 in Electrification and also given how strong the growth in the end market across the board has been and the capacity constraints? Do you see price -- stronger pricing there than in other parts of the group?

[Morten Wierod, executive]

Talking about pricing, for 2024, we got about 1% for the group out on price and was the same in the Electrification business. So we're a bit more back to the situation, as Ann-Sofie referred to over lead times today. It's more -- it's not back to, let's say, normal, but it is shorter. So the capacity is more in place, which also leads to -- I don't expect a lot of help from price in 2025. So it's more of the self-help that is needed.

What I am happy to see this year, which we've also been driving performance in '24 is that the traditional work of supply management of continuous improvement, more automation, more productivity in units that is also driving the performance. And that is part of the DNA of the Electrification team. As you know, I know that seemed very well as I was running it up until last summer. And I know that, that work is just a continuous, ongoing program or improvement year by year. And that is not stopping. That is -- need to continue on with that pace. So that is -- and we will see, of course, revenue growth and therefore, expect also a drop-through and having improvement also in that. As I say, we always want to improve in every business areas and every business that we operate. And that goes also for Electrification, even they are performing really well in '24, we expect even more in '25.

[Daniela Costa, analyst]

And the mix?

[Morten Wierod, executive]

I see the -- we don't see any significant change of mix the year of '25. It may be, as we had now in the fourth quarter, you could have quarterly mix changes. But for the full year, we don't see any significant change in mix now.

[Ann-Sofie Nordh, executive]

Thanks, Daniela. And we open up for Ben Uglow. Your line should be open. Thank you.

[Ben Uglow, analyst]

My question relates broadly to China. Morten, what -- can you give us a sense of what you're seeing on the ground qualitatively, meaning if we strip out that Robotics backlog issue, so it looks somewhat stable. I'm kind of in -- what you're hearing in Electrification because there is obviously data center business going on in China and also process and Motion. Just we talked a lot about stimulus. We've been waiting for things to get better. Do you see any green shoots or is it premature?

[Morten Wierod, executive]

It is still premature to -- we don't see it yet. Right now, our Chinese colleagues is on Chinese New Year. And that -- so when they are back in the office next Wednesday, I think you will see also a lot of things will be starting in China. At least that is often how the Chinese market is working, that post Chinese New Year, you will see a lot of the activities. And that's also, I think, where things were decided in October last year, it takes time to implement.

So we haven't seen it yet. I am though optimistic that some of these measures that has been taken will play in effect, especially in the renovation, decoration of apartments in buildings. I don't expect any building boom in China. You will not see that new residential or even commercial building, you will not see a boom there. But we have this opportunity on the renovation, which is a big portion of the part of the building business in Electrification.

Where we do see strong growth these days is in the utility space, integration of renewables, more in the solar and wind that is going, and the data center business is going very well in China as it does all over the world. So that's the -- when we look at China, the different segments is kind of from the plus 20 to the minus 20, that's kind of -- and we ended up at minus 1 when you take out the order cancellation for the fourth quarter. That's kind of -- so China is a mix between -- has been a bit between frozen ice and boiling water. That's the -- that has been a bit the average when we look into the market.

So our job also as a company is to find -- to take advantage of those growth opportunity that does exist in China and maximize that and not kind of sit back and wait for some of the traditional applications to connect that. It will still take some time before the kind of the building construction market is back in China that will still -- I don't expect that to come back in '25.

[Ann-Sofie Nordh, executive]

Thanks, Ben. And we move on to Andre from UBS, please?

[Andre Kukhnin, analyst]

I just wanted to dig into ABB Way contribution a bit more. You said that it contributed meaningfully in 2024. You expect a bit less for 2025. Could you give us some idea of how much it helped the margin in 2024? I'm just thinking more broadly about that scope for kind of looking into -- under the hood, as I think you said in the past, and Björn said, of business areas and looking at the overheads that sit at their business area level that should really be pushed into business units. What is the scope of the opportunity here altogether?

[Morten Wierod, executive]

We are now in the process, and many of the division has already completed, the rest is underway, by setting up their divisions in what we call business lines. And when we do that, we will be -- we are around 80 business lines for those 18 operating divisions. That's how we divide the company. And today, 75% of the revenue of ABB of -- in the divisions sits in that growth boat, which means that 25% is then under profitability improvement or under -- into the stability mode that we have won, which is the Machine Automation division. But we also do this, as I say, further down in the business.

And that's the -- for me, it's 2 things. It's how you drive the right behaviors when it comes to target setting, incentive plans, but then also the behavior, how you act in the market, it's important there, down on a business line level. And it's also -- it builds resilience when you see 1 division or 1 business line within a division is facing more of headwinds, they are expected to take actions and act faster and to deal with the challenge, even if the overall division is running well. And that's kind of the ownership performance that I like, what I kind of appreciate, what we see, because that builds resilient, not just to take a growth opportunity, and -- but it's, of course, also to watch any downturn of performance that you need to act quickly.

Even if your brothers and sisters on the side is doing well, if you're not performing, you need to take actions and fix it. I think that's the for me is the -- both the opportunity for growth, but it's also to build that resilience over time that people take actions right away. So we don't need large corporate programs to do cost savings. This is on everybody's agendas every day. And I think that's the -- and so there is, as I say, 25% of the revenue of the business is still looking at how they have to focus even more on cost and operational improvement and 75% still have to do that, but they are also expected to do M&As, they're expected to take more of market investment and expand and grow the business faster.

[Andre Kukhnin, analyst]

Right. And on 2024 contribution, if I may.

[Morten Wierod, executive]

We are -- I mean, we -- from -- as we say, already talked about from the 16.9% to the 18.1%, to say how many basis points out of that came from the ABB Way implementation, I think it's very hard to quantify. But -- I mean, what we do is that we -- and I believe that this is an important part, how over the years now, having moved from the 10, 11, now up to 18. And I also said that we will continue to take benefits out of the way of working. And that will drive performance so we can come up to the that's kind of our next target is to reach that end of our margin corridor before we move on.

[Ann-Sofie Nordh, executive]

Thanks, Andre. And then we open up for Joe at Cowen. Joe, are you with us?

[Joseph Giordano, analyst]

Can you hear me?

[Ann-Sofie Nordh, executive]

We can.

[Joseph Giordano, analyst]

Just curious about the margins in PA. I mean you've had really good trends there on the top line. And the orders, you mentioned, I think, 17 quarters in a row, positive. Are we kind of approaching like peak structural margins for the current portfolio? And if so, what can you kind of do there to push the ceiling higher in the future?

[Morten Wierod, executive]

Thanks, Joe. How we are driving performance there, as I say, there we have -- again, back to my last -- on this business line setup, it's to grow these high-margin business line faster and also to looking at how can we expand those portfolios. I was happy to see last year that we could make an acquisition in the field of -- in PA in the measurement and analytics division, and that goes into the -- to the Födisch Group in Germany that came on board, which it's an area where margins is significantly higher than the current PA margin. So that's a good expansion. The same also we made in the marine business. A nice acquisition in the -- with DTS in the Netherlands, which is an AI-based guiding systems where you can help ships navigate better and save fuel.

This is another great example, I think, in Process Automation of acquisitions, that is built on our strength in these industries and that we can expand the portfolio and therefore, also drive both revenue but also margins to a higher level. So -- but again, here, margin improvement for self-help but also to use the M&A tool to see how we can grow the higher-margin segments that we are in already and how do we grow those faster than some, let's say, core more traditional where we know that the profit pool is not as high. So that is the journey we are on and that is -- it's quite a few steps to take still before we hit any target or ceiling.

[Ann-Sofie Nordh, executive]

Okay. Thank you, Joe. And we move on to Seb at RBC. Seb, can you hear us?

[Sebastian Kuenne, analyst]

My question is on E-mobility, where you had a [ CHF 72 million ] loss, and it doesn't seem to be structurally improving. I spoke to your colleagues this morning, Bernhard, and he mentioned that there's not much write-downs in that loss. So it seems to be all operating loss. So basically, staff, R&D cost, development costs for the new products. So I wonder what's now the trajectory for E-mobility going into 2025? Do we still see heavy losses in the first half and then only an improvement when the new products are out? Or how should we see that business now?

[Morten Wierod, executive]

Yes. I mean we have taken -- I mean, E-mobility business was a big drag to the group in 2024, as you say, $270-plus million of losses where in there also you have the write-off some of inventory, but also the operational performance. We have continued to invest in technology to come up with a competitive offering. This, today, is now as T50, the 50 kilowatts, or the T400, the 400 fast chargers, kilowatt chargers, which is today, I would say from based on what I hear from customer feedback that it's top of the line and it starts to become a product that will change this whole business of E-mobility.

It still takes some time before you get that out in the market, and we see that the revenue is being transferred from the old product portfolio to the new one. Therefore, you will see a sequential improvement, which in this case means kind of removal of losses quarter-by-quarter until we come into our profitability situation. So that's the -- so E-mobility will still be a drag in '25, but a much smaller than what we faced in '24. So that will also -- Ann-Sofie mentioned earlier, will help us also in this year to improve the performance of the group.

[Ann-Sofie Nordh, executive]

And if I may, just try -- maybe I'm repeating now, if I wasn't listening carefully enough. But if I just try to frame sort of the lower losses expected in 2025. I mean on a high level, expect sort of half of the loss in 2025. And as you said, versus 2024. And as you said, the profile during the year will be sort of it will be back-end loaded for when we see the sort of improved performance.

Thanks. And we'll take a final question from Gael at Deutsche Bank.

[Gael de-Bray, analyst]

Look, it's been many years now that the ABB were program has been launched, right? So -- but the thing is the ABB Way transformation expenses are expected to remain fairly high once again in 2025. I think you mentioned $150 million. So -- I mean, at what point do we consider that these transformation expenses are recurring in nature?

And more generally, last year, there was a difference of about 200 bps between the adjusted EBITA margin and the reported one. So I was wondering where the business areas really feel accountable for all the items below the line and what could be done perhaps to make the performance cleaner in the future?

[Morten Wierod, executive]

No, we are running and we have been running 2 significant programs, what we call internally financed transformation, where we now have all our financial reporting cloud-based on one platform, which makes also a much better transparency internally. So we -- and it also drives speed and efficiency internally. So those programs -- that finance transformation program will come to an end now in 2025 by the half year.

The other program that we have been running and that we will also go live is a new large HR transformation program where we are implementing the use of Workday as over one single tool for all employees, and we will go live by summer as well with that program. So 2025 is the year where you will see these programs being kind of executed. It was in '24. It's now in '25. And then you will see lower cost. But of course, we will work on -- we have to make sure that we get the right cost out and the right return of these investments we have now over the last few years, and that is the -- is what is our target now for '26 and onwards when now the -- we are fully -- when we will be fully up and running in the new environment.

[Ann-Sofie Nordh, executive]

So just to summarize, from a cost perspective and the line of ABB transformation costs, below the line should basically disappear after 2025.

And with that, we say thank you very much. We made it, Morten.

[Morten Wierod, executive]

Well, they are the judges of us.

[Ann-Sofie Nordh, executive]

Well, true. True. So we thank you. Thank you very much. And just as a quick reminder, as we go. I hope you've seen that we've announced that we'll have a Capital Markets Day in the U.S. in November. And hopefully, see you before then, but at least I hope to see you there as well. Thank you very much.