Investor Update

Jun 10, 2020

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 Roisengren, our CEO and Timo Ihamu Chila, 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 risks 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 a presentation from 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 Bjorn. So thank you, Geert, 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 Zurich and we could meet you physically, but you know the circumstances. Today, these virtual meetings is actually becoming new every day. Hopefully, this will change moving forward. I yes, I must also say that yesterday, we had one of these virtual meetings with all our 500 highest employees, the so called 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 a 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 other were facing different kind of challenges. For ABB, I think the Q1, 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 going 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, robotic 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 Carantan, 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 our motion business have actually increased the number of customer contacts during these times. So hopefully, we learn some from these because some of these visits when you meet a 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 this 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 have 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 there. 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 with 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 I have 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 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, is to drive the profitability or the operational margin of the company to a reasonable level. And between 13% 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, new 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 the 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 and 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 three-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 online 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 are being observant, but I can't read product line. Now it says divisions and it says business areas. So from 1 July, we will rename what we call the business lines today to the name divisions. And the 4 businesses that we have today will be renamed to business areas. So you could also say that here, 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 and 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 work 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 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 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 one suddenly grow up? No. Within electrification, we added one 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 €1,000,000,000 in size up to yes, the largest one is close to €5,000,000,000 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 EBB and started 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 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 at 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, 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 one axis and the other one is how much profit they are generating. And 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 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 functional. 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 businesses, performance management is key to success. So what I mean with performance, 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 manage through scorecard system, which is a number of KPA where we can follow the development of the different KPAs 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 this 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 1 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 piece. 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 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 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 a 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 number 1 or number 2 in the market. So why is it important that a business is number 1 or 2 in the market? There is a relative difference between profitability and market share. And if you are perceived from a customer perspective as a 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 and D. And I think you understand that ABB is being a very technical focused company. R and 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 there? Are we not going to have any kind of synergies? Then I'll say number 1 is, there are thousands of 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 central here telling them that you 2 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 parts, 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, it's 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 governance under our industrial automation business area and support all our businesses. Portfolio Management. 1 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? 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 with 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 central 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 sooner as we now come to an end to this project that we manage to save the €500,000,000 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, Bernd, 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 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 €500,000,000 cost reduction continues to be there, and we will execute to that target. But as Bjorn 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. 2nd, we are introducing a new performance management system with the scorecards, and I'll talk a bit more about that in a minute. And 3rd, 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, 2018, we had about 18,000 people in the corporate domain and about €1,100,000,000 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 1300 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 $500,000,000 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 lowest in the corporate history, but that is not what we mean by ABBOS cost savings. This is going back what Bjorn 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 and 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 US300 $1,000,000 but now with no 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 €300,000,000 corporate cost, we would be quite close to this 15%, which Bjorn 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 ABP 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 implement. Believe me, I mean, I have been working on this now, what we'll 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 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 group targets. And we will implement this from Q4 sorry, Q3 onwards, so we'll actually move 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 these 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. We are in touch with this topic as well. And I'm going to go a little bit through, let's call it, the methodology 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 Bjorn 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 number 1 or number 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 are we 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 third of a weight. So this is a very systematic way, which we will move forward with. We continue to discuss if we should move from operational EBITDA 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 non core quite a few, let's call it, non operational items running through the P and 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 Bjorn 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. Spoke about the power conversion business. We announced the strategic review, went through the process. We couldn't find a value which would have been satisfactory, decided to keep the business, and now we will continue to 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 product 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 Bjorn, 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 and 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 within this framework, we have scope for inorganic opportunities for divisions where growth this way would be an appropriate strategy, although we are not expecting any large M and A in the medium term. So our 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 Bjorn. Please. Thank you, Timo. I think this sounds promising from my perspective. I think we're very much aligned on these points. Now 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 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 health and safe way, very important and high priority within ABB. Sustainability. I'd like to talk a little bit 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 product and the solutions and the service that we offer, it 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 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? 1st, 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 precedent, 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 a 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 acquisitions during the last 10 years. Now it's important that we get the full value and synergies out of those business. And 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. With that, I would like to thank you very much and looking forward to some exciting chats. Thank you.