ABB, Ltd. (OTCPK:ABBNY) Q4 2023 Earnings Conference Call February 1, 2024 4:00 AM ET
Company Participants
Ann-Sofie Nordh – Head of IR
Bjorn Klas Rosengren – CEO
Timo Ihamuotila – CFO
Conference Call Participants
Andrew Wilson – JPMorgan
Max Yates – Morgan Stanley
Daniela Costa – Goldman Sachs
Gael de-Bray – Deutsche Bank
Sebastian Kuenne – RBC Capital Markets
Andre Kukhnin – UBS
Alexander Virgo – Bank of America Merrill Lynch
Daniel Cunliffe – Societe Generale
Joe Giordano – Cowen & Company
William Mackie – Kepler Cheuvreux
Jonathan Mounsey – Exane BNP Paribas
Sean McLoughlin – HSBC
Ann-Sofie Nordh
Greetings to you all, and nice to connect again as I welcome you to this presentation where we will talk through the results for ABB’s fourth quarter.
I’m Ann-Sofie Nordh, Head of Investor Relations. And next to me here is our CEO, Bjorn Rosengren; and our CFO, Timo Ihamuotila. They will take you through the presentation, before we open up for questions.
But before we begin, I should mention the information regarding Safe Harbor notices and our use of non-GAAP measures on Slide 2 of the presentation. This call includes forward-looking statements, based on the company’s current expectations and assumptions which are subject to risks and uncertainties.
And with that said, we kick off the presentation, and I hand over to you, Bjorn.
Bjorn Klas Rosengren
Thank you, Ann-Sofie, and a warm welcome from me as well. I want to start with some quick reflections on 2023. And I’m proud to say that it was a record year for ABB. Some proof points of our success includes that we improved on all lines in the P&L, and in many cases to new all-time high levels. We delivered record high cash flow and return on capital employed, a great team effort.
So how did we do this? First, it was a solid overall market environment. We have a good business mix, and this year we saw a strong momentum in the long cycle business, which more than offset the weakness in part of the short cycle offerings. In total, our comparable orders improved by 3%, and our book-to-bill ratio was 1.05.
Secondly, we are more efficient and agile company. We took actions to further push the ABB way operating model within some divisions. And one success story is that the turnaround in the large motor business. They have done a great job and improved in many ways, including how they work with value-based pricing. It was really good to see that they took the margin to a double-digit territory.
But I do not look at 2023 as something extraordinary. What do I mean with that? You know, our business is to help the world accelerate the energy transition towards electrification. We also help customers to become more efficient and safe through our automated and digital manufacturing. ABB has a leading position in markets driven by strong secular trends. And we are confident about the future, which is why we raised our long-term financial and sustainability target at the CMD in November. In short, we target higher growth and higher returns while enabling a world with net zero emissions.
Finally on 2023, the Board proposes a dividend of CHF0.87, an increase of 3 rappen from last year is more than the usual annual increase of 2 rappen. This is based on the strength of the ABB way operating model and the futureproof market position. We also expect to continue to utilize share buybacks as a way to return excess cash to shareholders.
Now, let’s turn to page four for some more detailed comments on the fourth quarter. My key takeaway from Q4 are that comparable orders remain stable from last year, meaning total demand is holding up, despite weakness in the short cycle business. Book-to-bill was below one, but I’m not so worried about that. It is a normal pattern in the fourth quarter. I expect stronger outcome already in Q1.
Secondly, we improved operational performance and delivered record cash of $1.9 billion, up by $1.2 billion from last year and even stronger than expected. And we improved return on capital employed by 460 basic points to 21.1%, a strong outcome in my view.
Lastly, I’m pleased to see the division utilizing our strong balance sheet. We have recently signed seven small bolt-on acquisition. Most of these deals add more embedded software and AI capabilities to our offerings. This will support our market position long-term. In summary, we delivered in line with our guidance and I’m pleased with the solid finish of the year.
Now let’s turn to page 5 for some more detailed comments on the market development. As I mentioned earlier, demand was resilient and comparable orders increased in three out of four business areas. We saw a stable to positive development in most customer segments, with then softer areas to mention being residential constructions where we see weakness in both China and U.S. while Europe seems to be stabilizing at a low level. The other areas was discrete automation where we saw similar pattern as in recent quarters.
Timo will talk more about the details on the slides on the robotics and discrete automation. We expect the challenge in RA to persist also in Q1. However, we believe the fourth quarter was a low point for absolute orders. In total, for ABB orders remain stable year-over-year and the order backlog remained strong at $21.6 billion.
Now let’s turn to slide 6 and look at the market pattern from geographical perspective. Comparable orders increased in two out of three regions. The Americas is still where the underlying market is most robust, with a continued solid customer activity in the US. AMEA grew by 2% and we see a strong development in, for example, India. But China is a challenge. With softer activity in several segments, Europe declined by 5%, mainly impacted by the weakness in discrete automation.
Now, let’s turn to slide 7, our earnings outcome. In the chart, you see the strong improvement in both earnings and margin. Operational EBITA was up by 16% and margin increased by 150 basic points to 16.3%. This was supported by good price development and higher volumes, which clearly offset the labor cost inflation. I am pleased about the outcome. This was a fourth consecutive quarter where gross margin was above 35%, a strong improvement compared to historic levels. In total, the fourth quarter was a solid end of the year.
With that, I will hand over to Timo.
Timo Ihamuotila
Thank you, Bjorn. And greetings to everyone from my side as well.
As usual, let’s start with electrification on slide 8. The market pattern remained very similar to the previous quarter. Comparable orders improved by 2% from last year. So a continued resilient demand where the project and systems related offerings was robust. And the short cycle business actually stabilized after some weak quarters.
In terms of market segments, as a total, it was only residential construction, which declined overall, weighted down by weakness in both the U.S. and China. However, on a positive note, we saw some signs of stabilization for residential demand in Europe, including Germany, albeit at a low level. The other area to mention is China. Not all is bad, like continuing strong demand for data centers, but several other large segments declined, including both construction and utilities.
Turning now to revenues, the electrification team again did a great job executing during the quarter, resulting in 8% comparable growth. Higher volumes was the main driver, with good additional support from price execution. It’s really nice to see electrification holding on to their established higher margin level. At 19.7%, the operational EBITA margin improved by 310 basis points from last year, with a fairly even support from volume and price. This more than offset the higher labor costs, as well as higher investments in R&D and SG&A expenses. All-in-all, another strong quarter for electrification.
Looking ahead into the first quarter, we currently expect the growth rate in comparable revenues to be similar to what we saw in Q4, and the operational EBITA margin to be slightly up sequentially.
Let’s then move to slide 9 and the motion business area. Thanks to the continued good momentum in the long cycle businesses, with some large orders booked mainly in the traction division, comparable orders increased by as much as 13%, admittedly from a relatively low level last year. From a segment view, this meant that customer activity was high in the process related areas of oil and gas, chemicals and mining, as well as for food and beverage and rail. A weak construction market weighed on demand for the HVAC side.
Revenues were up by 2%, again surpassing the $1.9 billion level. The impact from higher pricing and volumes in the drives divisions more than offset the slightly softer volumes in the motor divisions. While the gross margin was slightly up from last year, motions operational EBITA margin came in at 16.6%, decreasing by 80 basis points. The main reason to the drop was some product quality costs with a negative impact of about 60 basis points year-on-year. This was limited to this period and should not be a topic in the coming quarters.
Looking ahead into the first quarter, we anticipate a low single-digit growth year-on-year in comparable revenues and operational EBITA margin to decline somewhat from last year due to a changing mix with a higher share of long-cycle deliveries.
Turning to slide 10 and process automation, where comparable orders increased by 5% year-on-year. This includes a large order booking of about $150 million, which will be delivered over a number of years. From a segment view, the marine and ports demand was strong, but we also saw good momentum in low carbon-related areas such as LNG, hydrogen and carbon capture. The product business noted some slowing momentum after a period of really strong growth.
Comparable revenues were up by 10% with strong growth in all divisions. This was driven mainly by volumes but also some positive pricing coming through. It was another good margin quarter for process automation. They delivered an operational EBITA margin of 14%, improving 80 basis points year-on-year and with all divisions at double digit margin levels.
Most divisions contributed to the underlying improvement on the back of better project execution and delivering higher volumes from the backlog with improved gross margin. Looking at our expectations for the first quarter, we foresee a mid-single digit growth rate for comparable revenues and the operational EBITA margin to be slightly up from the Q4 level.
On slide 11, we turn to robotics and discrete automation, where comparable orders declined sharply by 33% from last year. The market pattern is similar to the previous quarters, meaning in machine automation customers are holding back on placing new orders as our delivery lead times are reducing back to the shorter normal time span. In robotics, demand declined across the board.
3C Electronics was the key weak segment and although automotive orders softened somewhat year-on-year, this is more linked to timing of some large orders rather than a real change in the market. RA orders are challenged right now but we expect, as Bjorn said, the fourth quarter to have been the trough quarter for absolute order intake. We anticipate order normalization to level off during the first half of the year.
Moving to revenues, which decreased by 7% on comparable basis, the machine automation division had strong revenue growth as they execute on the order backlog. However, this was more than offset by the missing book-and-bill volume in the robotics division. It was good to see that RA margin held up well at 13.8% and keeping largely stable despite the drop in revenues and added pressure from labor inflation. This was achieved through improved mix with higher volumes in machine automation as well as by stringent cost control. For the first quarter, we expect a mid-single digit negative growth in comparable revenues and some sequential pressure on the operational EBITA margin due to mixed impacts.
Then moving on to slide 12, showing the Group operational EBITA Bridge. The profile is very similar to the last couple of quarters with the earnings improvement driven by strong operational performance. The impacts from our positive price execution at about 2% and leverage on higher volumes more than offset the adverse effects from cost inflation related mainly to labor. All-in-all, a 16% improvement in operational EBITA with 150 basis points margin increase.
Let’s now move on to cash flow on slide 13. Now this is a really nice picture. You may remember we set a target for ourselves to deliver a free cash flow of $3 billion this year. We did even better, with total free cash flow of $3.7 billion. All business areas contributed with improved operational cash flow and the fourth quarter was a really strong finish to the year. It was good to see that our focused efforts paid off as net working capital was reduced sequentially and the ratio to revenues was at 10.2%, down from 12.8% at the end of Q3.
We lowered inventory levels and reduced receivables despite the strong revenue growth. We also had some additional support from customer advances. A great job done by the ABB team and we expect a good cash delivery also in 2024, supported by operational earnings and continued focus on networking capital.
Then taking a look at our return on capital employed development, you see in the chart that we clearly beat our target of about 18% as we reached an all-time high level of 21.1%. A strong return on capital improvement of 460 basis points was driven mainly by better operational performance. As you can see, last year’s capital employed calculation included the negative impact from the 19.9% ownership in Hitachi Energy. However, even excluding this, the improvement was still an impressive 330 basis points.
Overall, the improved return on capital employed is a good indicator that we are really improving ABB’s long-term performance and operating at a best-in-class level.
And with that, I will hand off to Bjorn to round off this presentation.
Bjorn Klas Rosengren
Thank you, Timo for the insight. Let’s finish off with the slide 15 and some outlook comments, as I know, this is a focus area. In the full year of 2024, we expect a positive book-to-bill. We anticipate a comparable revenue growth of about 5% and operational EBITA margin to slightly improve from the 2023 level of 16.9%. For the first quarter, we anticipate comparable revenues to grow at a low to mid-single digit rate and operational EBITA margin to remain stable or slightly improve year-over-year.
With that said, let’s open up for questions.
Question-and-Answer Session
A – Ann-Sofie Nordh
Yes, let’s do so. [Operator Instructions] For the phone lines, I kindly ask you to limit it to one question and then get back in line for any additionals. I know there are plenty queuing up here, so kindly ask you to respect that.
And with that said, let’s open up for the first question. We’ll take one from the phone lines and we open up for Andy at JPMorgan please. Your line should be open.
Andrew Wilson
Hi, good morning, everyone. Thanks for taking my question. It’s actually around the comments on the buyback, Bjorn. I guess just trying to get a bit better understanding kind of the various factors playing into the thinking on not explicitly announcing anything today, but I guess making comments sort of intimating towards that, given obviously what was a fantastic Q4 cash performance, balance sheet’s over a very good check. I mean, is this something mechanical in terms of when you would announce it or is there more to it for us to think about?
Bjorn Klas Rosengren
Andy, I will excuse you for this time because you haven’t been following us too long. But the one of you who has been following us knows that this is actually an AGM question. So that has to be decided on the AGM. And after that is normally when we announce it. So that is absolutely the reason. But we indicated, of course, that we will continue to use the buyback as a tool to return cash. I hope that’s okay.
Andrew Wilson
Very clear. Thank you. Very clear. Thank you.
Ann-Sofie Nordh
And we take the next question from Max at Morgan Stanley. Are you with us, Max?
Max Yates
Thank you. Good morning. Yes, I am. Yeah, thank you. Good morning, Bjorn. Good morning, Ann, Good morning, Timo. I just wanted to ask about your confidence on the positive book-to-bill for 2024, because I guess if I look at the sort of cadence of your orders as you’ve gone through this year, we started at kind of $9 billion plus, where we’re exiting the year. Sorry, we started at $9 billion plus. We’re exiting the year at sort of $7.6 billion.
So obviously, kind of if we take the second half run rates, we’re running kind of below, I guess, a positive book-to-bill. So I guess my question is, from where we stand today at sort of the $7.5 billion to $8 billion level, which of those — or which of those divisions do you really expect to kind of sharply improve, I guess, and excluding robotics and discrete automation, because that is one of the smaller divisions. But just where do you really see the kind of sequential improvements as we go through the year to secure that positive book-to-bill?
Bjorn Klas Rosengren
Yeah, of course, all our numbers is built up from our divisions and consolidated up to be the expectations. But yes, we think that we are well-positioned on many of these larger transformational deals that we expect that will come in during this year also. And during the second part of the year, we expect the short cycle business also to improve. So this is, of course, an early time of the year to announce that. But these are the best indication that we have from our businesses.
Max Yates
Okay, I’ll leave at that. Thank you.
Bjorn Klas Rosengren
And I mean, I think when you come to the robot, and from the order perspective on the robot and discrete automation, we believe that the fourth quarter that we see is the bottom out of that business and we should see an improvement in this success [ph] coming during the year and especially on the second part of the year. That’s in our plan.
Ann-Sofie Nordh
Okay, thank you.
Max Yates
Thank you.
Ann-Sofie Nordh
Thank you. And we’ll continue on the topic of sort of orders book-to-bill with a question here from the online tool. It comes from Mattias Holmberg, and it says given the guidance of book-to-bill of more than 1 in 2024 should we view the elevated length of the backlog as a new normal or do you expect at some point to work down the backlog. Maybe for you Timo.
Timo Ihamuotila
Yeah maybe. Yeah so first of all on this backlog length, so it’s fair to say that our orders are a little bit longer at the moment. But you really have to look at this now business area by business area. So if you look at for example electrification, there we have a backlog up quite a bit maybe just round number sort of $500 million type of number. That pretty much is going to convert all during the year. And also in PA clearly we are up a lot. We will get support from the backlog on growth. In motion, we have a bit longer at the moment but we will still get support for growth.
And then RA is of course quite a different story where the backlog is down quite a bit. So you really have to look at these backlog dynamics at the moment business area by business area. But of course we are as Bjorn said we are also expecting improvement in the shorter cycle business.
Just to remind everybody that during ’23 I think our shorter cycle orders went down close to 10%. So we are of course coming from a bit of a different level there.
Ann-Sofie Nordh
Okay and then we go back to the phone lines and open up for Daniela. You with us there Daniela.
Daniela Costa
Hi good morning all. Thanks for taking my question. So I’ll move from volume into pricing. Can you comment a little bit on the outlook that you’re seeing now that things seem to be normalizing across the older value chains and maybe in particular focus on what you’re seeing in China where we hear lots of comments about deflation in other areas of economy. Thank you.
Bjorn Klas Rosengren
Yeah, I mean this year you saw about 2% price increase compared to us, and I think moving into next year is more related around 1%-ish that we are expecting. China I think we should not expect too much when it comes to price increases. That would be the challenging part. So the pricing will probably come from the other parts, North America and in somewhat also Europe.
Ann-Sofie Nordh
Thank you, and we’ll continue — I’ll tie on to that, on the topic of China. We have a couple of questions here coming through on the online channel and I’ll bundle them into one here.
And I think for you, Bjorn, can you give some more color on China specifically discrete automation or basically what do you expect for China in 2024?
Bjorn Klas Rosengren
Yeah. I actually recently was also spending some time in China with our operations, and it’s quite clear that it’s the robotic and discrete automation who has the biggest headwind. And that has also been during the last three quarters, if you look at from that perspective. Yeah, it’s difficult to say, China for what’s going to happen. And normally a good indication of China you get after the New Year, Chinese New Year. Then it sets the standard for the year.
So we still have to wait a little bit, a couple of weeks before we get the feeling of where it will come. China is a little bit of a mixed bag. We see better development in the motion part as well as in the electrification. Also on the process automation there’s some good stuff. So it varies a little bit between the businesses. It’s clearly — it’s the discrete automation and robotics who has the most headwind, yeah. You want to add something?
Timo Ihamuotila
No, I was just going to add to this that we said today in the whole RA orders that we expect this $550 million to be the low point. So already for Q1 we expect higher orders in RA.
Ann-Sofie Nordh
Okay and then we go to the phone lines again and open up for Gael at Deutsche Bank.
Gael de-Bray
Oh, thanks very much. Good morning everybody. Could you provide perhaps a little bit more color on the growth and margin guidance for 2024? I mean which business areas do you see contributing the most, the growth and the margin targets this year? And specifically are you still confident that process automation and robotics and discrete will deliver margins of at least 15%?
Bjorn Klas Rosengren
Yeah, I mean you’ve probably seen that both of them first they are around between 14% and 15% both of those business areas. I mean on the process automation, you know my feeling of that is it’s a well-positioned business that we are really benefiting from the transformation towards a more sustainable future. And this is both, when it comes to base industry, tradition-based industry that are changing as well as you are seeing some of those new exciting projects.
I think when it comes to process automation they have done an excellent job in getting their performance above what they actually expected is possible. And you should also know that this is without the turbo [ph]. So the performance over 14% or around 14.5% is an excellent performance.
Yeah we believe that they have the capacity to stay on this margin. I don’t expect them to go much higher at the moment but around these margins I expect. On the discrete automation and on robotics of course as the volumes have gone down they will face some more margin pressure during the year. That is pretty clear. But they are taking the actions in both P&R as well as in robotics to adjust their organization in line with the demand in the market. And I think they will be doing that in a good way.
Timo Ihamuotila
Yeah, maybe if I just comment on the top line part of the question on because we said around 5%. So as we go into the year now our base case would be a little bit like electrification maybe not higher than that. And same for PA on top line. And then maybe motion could be a bit lower, let’s see. And then RA has tough time getting there. So a bit lower clearly than the 5%. So that’s kind of like how we see the dynamics between the business areas.
Gael de-Bray
Thank you very much.
Ann-Sofie Nordh
Thank you. And then we take the next question from Sebastian at RBC.
Sebastian Kuenne
Yeah good morning. Thanks for taking my question. I have a follow-up on pricing and raw materials and the cost margin. So you mentioned that pricing helps quite a bit on the revenue and margin in Q4. But of course the orders you take in are on average with an 8% lead time. I was wondering what you see based on the current order intakes that you have. Do you expect the gross margin to go up from that, with all your calculations on raw material and cost there. So I would like to have a better idea of the gross margin development here. Thank you very much.
Bjorn Klas Rosengren
Yeah, I mean the gross margin development is one of course one of the big success stories during the last years. And if you just see during Q4 we saw somewhat improvement, small improvement on the gross margins which continues to go up. And the order book has a quite a good gross margin in the whole order book. So that looking quite promising. It’s of course difficult to say what the future have to offer. We believe that we are not getting out as much pricing as we did on the previous.
On the other hand there is less pressure on inflation from suppliers because the world is actually normalizing in a way that we had before. So the businesses will continue to drive efficiency. And for us it’s important that the businesses have, what we say a gross margin productivity that is a gross margin per employee for over 5%. That is the target for each of the business. And that’s also what we expect them to deliver. And you can do that of course either to grow your pricing or you need to keep your cost under control.
Timo Ihamuotila
So yeah, if I just throw numbers in there. So as Bjorn said we have a notch higher backlog gross margin going into ’24 than we had going into ’23. So that’s like a good thing, on the gross margin side. And then we have also a situation where there is not much, as we expect again going into a year, not much other inflation than labor inflation in the gross margin. And that we should be able to sort of cover with the 1% price, what Bjorn mentioned and then of course with growth we should get some leverage on the gross margin side as well.
So it looks like an okay picture going into the year with the gross margin as well.
Sebastian Kuenne
Understood. Thank you very much.
Ann-Sofie Nordh
Thanks Seb. We move to Andre. Your line should be open now.
Andre Kukhnin
Hi. Good morning. Thank you very much for taking my question. I wanted to dig into the trends in medium voltage part of your business in a bit more detail and particularly in the electrification part. Could you talk about maybe at what pace this is growing now and how pricing has developed in that business within the 2% that you delivered overall? And also are you planning to ramp up capacity in this space given the growth or we’re still at the stage where capacity is still ample and you can just benefit from leveraging that.
Bjorn Klas Rosengren
Thank you for the question. Yeah, I’d be happy to talk about the medium voltage. And I think this is both in electrification as well as medium voltage drives which has had a tremendous development. And DS which is the medium voltage business have had a great development both when it comes to orders and growth. But these are of course a little bit longer term. So we should see in the years coming closer.
But mainly the gross margin in this business and the profitability of this business has now come up to where actually it should be in both of these business. And this is actually compensating some of the somewhat weaker low voltage business that you’re seeing in for instance in low voltage drives. So that has had a good development. And it is as much as 25% of our portfolio today or our invoicing is actually a medium voltage. And that is developing in a good way. Anything you’d like to add Timo?
Timo Ihamuotila
No, I actually — I have to admit I didn’t check that number now going into this call. This is because we have earlier spoken about this number. So I don’t have it on top of my head. But if you look at some of these areas where we had order growth like Bjorn, mentioned system drives or traction and so forth. So it is definitely continuing the trend in those areas.
Bjorn Klas Rosengren
Yeah, this is really the strongest part of our business at the moment.
Andre Kukhnin
Thank you. And if I may just are we in double digit growth on the territory there and then just on capacity if I may.
Bjorn Klas Rosengren
You mean on the investment. Yeah sure. Yeah, I mean this is — yeah, we are investing in capacity especially in North America. That is — and that’s also why we expect a little bit more CapEx during the year that we saw last year. And that is related to building some factories in. And that is it’s a combination of the medium voltage going up but also to becoming more self-sufficient in the North American market. So yes, there will be some capacity building out.
Andre Kukhnin
Great. Thank you very much.
Bjorn Klas Rosengren
Thank you.
Ann-Sofie Nordh
Thank you. And then we open up the line for Alex Virgo please. Alex are you there?
Alexander Virgo
Yeah, thanks very much. Good morning, Ann-Sofie, good morning. Bjorn. Good morning, Timo. I wondered if you could just dig a little bit more into the details for us in short cycle trends. And Timo, maybe could you give us the differences between robotics and machine automation just as we’re trying to think about building on Max’s question earlier on around the sort of the book-and-bill and thinking about how you see that sort of trajectory of recovery. I appreciate your comment on orders in robotics normalizing in the first half.
I’m just trying to get a sense of this sort of stabilization in short cycle that you’re talking about and where that’s coming from, given also your comments on the short cycle in EL as well. So EL and RA short cycle could you sort of split that out for us a little bit more please.
Bjorn Klas Rosengren
Yeah, maybe I just start up a little bit with the robotic business. So when you see orders down 33% this varies between the discrete automation robotics. The robotics is down about 16% and the rest of it is actually on the discrete automation. It looks a little bit different also in the order book in the two different businesses. We are quite — we have a smaller order book in robotics today than we have in discrete automation.
And you probably remember when — during that time where we had difficult with the supply chain issues we had a quite a big building up of order book in the discrete automation where we believe it should be sufficient for at least the two more quarters on that side. Robotics is more depending on getting short cycle business in during this period.
Timo Ihamuotila
Yeah, maybe I’ll just say proportionately smaller because it’s of course smaller business as well. But Bjorn is absolutely right. So if you look at before this whole supply hassle in machine automation, the order book was maybe sort of $200 million, $300 million. We are still somewhere like $700 million. So we have, I don’t know, a couple of quarters still to execute from the order book and then we will need to see in machine automation also improvement in short cycle whereas in robotics we are expecting that to start to happen already earlier as we said.
Ann-Sofie Nordh
Okay.
Alexander Virgo
Okay great. And on the EL as well could you just comment on the short cycle. You mentioned low voltage in the answer to the last question.
Bjorn Klas Rosengren
Yeah. A little short on that. I mean on the electrification it’s a little bit different. I think this is a more solid order book right over. So on the low voltage, of course with a lot on the braking business so we call it smart power continue to be very, very strong in our book where we’ve seen some headwind for quite some long time is in the smart building part of it and it’s very much related to the German market. But they have taken the measures to adjust the organization and you’ve seen some of those restructuring costs taken during the fourth quarter actually related to that.
But it’s quite clear also that the DS, the medium voltage part of the package is where you’re seeing the best improvement during the year both when it comes to order in, as well as financial performance.
Timo Ihamuotila
Exactly. And as I said earlier about $500 million higher order book in EL. I mean that’s in our papers which we put out today. And if you look at it 15, whatever $15 billion business so that will give you a couple of points at least coming from the order book and then the rest will need to come from book-and-bill, like on the short cycle.
Alexander Virgo
Great. Thanks.
Ann-Sofie Nordh
Thanks Alex. And then we open up for Daniel Cunliffe.
Daniel Cunliffe
Hi, great. Good morning, Timo. Good morning, Bjorn, Ann-Sofie. Timo, question on cash flow. I saw it’s really where networking capital is going nicely. $12.8 million to $10.2 million. Do you think you could go below with $10 million further inventory improvement here? And then if you maintain the margins, or as you guide a slight uptick you think we could see a repeat of this very strong $4 billion plus operating cash flow going forward and whether that’s a new sustainable high level? And then obviously with that step up, any comments on capital allocation, M&A. Thank you.
Bjorn Klas Rosengren
I can take the first and then on the capital location I give over to Timo. So I think when we look at the cash flow and of course we are very happy to see now the inventory levels going down. So it’s a combination of margin improvement as well as inventory going down. Yes. And the cash flow was of course very strong, stronger than we have anticipated. We believe that the inventory should go down under $10 million. Yes, that should be the journey. And we’ll see how long time it takes to get there. But I can assure you part of the incentive program during next year is to continue to drive down the networking capital and that will automatically generate that.
I think we have a good potential to deliver good cash flow next year. If it’s going to be as high as $3.7 billion, I cannot say but I think definitely we should be over $3 billion. That is my feeling. Maybe you would add into that.
Timo Ihamuotila
Yeah. I mean well if you kind of like — let’s call this sort of a base case type of thinking or so if we would grow this 5% and do it with this margin, we will have some cash coming from operating performance improvement, say $250 million, $300 million. Then that at the same networking capital revenue, that growth would tie maybe $150 million, bit more CapEx, bit bigger cash flow. But we could be even on sort of $3.5 billion type of areas.
And then if we can release more, as Bjorn was sort of alluding to, let’s see how it goes, how long it will take then it could be even a bit better. Yeah.
Daniel Cunliffe
Okay. Perfect. Thank you very much.
Ann-Sofie Nordh
Thanks Dan. And then we have Joe Giordano in line here. Your line should be open.
Joe Giordano
Hi guys. Thanks for taking my question. Just curious on PA, can you give us some color on that large order? And then also there was an article the other day about Saudi Arabia kind of directing ARAMCO to pause expansion plans. I am just curious if you’re seeing like when you think about forward orders or stuff like that in like oil and gas and that [indiscernible] do you expect a slowdown at all in any of that?
Bjorn Klas Rosengren
Thank you for the question. Yeah. I mean the Middle East have been quite good for us. So of course driven also by PA projects in that part. You saw — we actually see the Asia and Middle East doing the same part. So the weak China was actually compensated good by both strong India but also strong in the Middle East. And yes ARAMCO is an important player there. But it’s not only in the oil and gas project. It’s actually in a lot of renewable projects also where we’ve been benefiting.
You know they’re setting up the world’s largest hydrogen plant where we actually got one of our biggest order a number of quarters back. So yes it’s quite a lot of activities. And we believe that there should be a mix from both transition. I mean the energy security regarding to LNG investments at the same time that many of these companies will continue to invest in transformational projects. And I think we also saw the COP meeting now down in the region there of course also triggers a lot of activities. And historically ABB has a pretty good position there and we should benefit from that area.
So PA is exciting. Of course it’s very much a large order in this. But it also has a very strong service organization which is about 50% of that part.
Timo Ihamuotila
You know that actually I forgot to mention this when we were talking about the drivers for ’24 that we actually had a very strong service orders during Q4. Actually in all BAs the service orders were growing. So that’s also a bit of a positive going into ’24.
Bjorn Klas Rosengren
I hope that answers your question, Joe.
Joe Giordano
Any detail on that large order there. Yeah just curious, any detail on the $150 million, on that big order you had there.
Bjorn Klas Rosengren
Is that 1…?
Timo Ihamuotila
$150 million, the large order which we mentioned separately.
Bjorn Klas Rosengren
Yeah. I see this is related to marine. And it’s good to see that the cruising industry is on building there is booming enormously. And as you know we have a very strong position there with our assay [ph] ports and electrification of the part, and we’re benefiting quite well of that. Yes.
Ann-Sofie Nordh
Thank you.
Joe Giordano
Thank you.
Ann-Sofie Nordh
Thanks Joe. And then we move to Will Mackey please. I think your line should be open now.
William Mackie
Yeah. Good morning everyone. Thanks for the time. My question relates to risk, political risk actually. It’s significant year for elections particularly in the U.S., and changes in geopolitics. So I guess the question is how well is ABB positioned to address potential risk from changes in regulation around imports or exports into China or actions such as an across the board tax increases for imports into the USA.
Bjorn Klas Rosengren
Yeah. Thank you for the question, Will. This is of course one of the subjects that we have been focusing on for many, many years but also even more during the last years because of the situation. We have this strategy, local for local meaning that we try to be as self-sufficient in the different regions as ever possible. And we are as you know in China 90% to 95% self-sufficient. That means supply, production and deliveries.
And we are now investing in North America. It’s based on the IRA but also that we think the U.S. will be — maybe risk for US being more let’s say challenging to transport into. So we need to be more local there. I think we’re going from 85%, 80%, 85% that we’re moving towards 90% self-sufficient. So it’s part of it. It’s quite interesting that you ask this because we have got a lot of questions today regarding the Suez Canal and the impact on ABB here.
And it’s quite interesting that up until today we have no material impact at all from that challenges down there and logistics, longer delivery times. So far our strategy has worked quite well. But on the geopolitical side there is of course another angle on this is that it’s more uncertain. The future is as more hesitant are the individuals and the companies to invest. I think that is probably a bigger impact on us. And that’s why we also mentioned it in the report. No one really knows where the world is going at this moment. There is too much. There’s a lot of uncertainties there.
Ann-Sofie Nordh
Yes. Thanks Will. And then we open up the line for Jonathan Mounsey.
Jonathan Mounsey
Yes. Good morning. Jonathan from BNP Paribas Exane. Just a couple of questions. First of all you touched on China and the outlook. The 5% organic sales growth at the Group level. Within that does that assume that China contributes to growth next year? And probably similarly on Germany where the message on order intake is a bit similar. It talks about double-digit declines in Q4. Given how weak that intake was, where are we tracking sequentially in Germany? Is it levelling off? Do you think Germany will contribute to that 5% growth in 2024?
Bjorn Klas Rosengren
Yeah. Let me start with Germany because you saw in Q3 we had — we’re down 33%. At that time we also said that this is also because there is a tough comparison. We saw now minus 17%. And that — our feeling is now that we are bottoming out in Germany. It has not been worse. Rather maybe we see some small improvements. So let’s see what’s coming up. But we are a little bit optimistic that there could be some better from really low level.
On China, I mean if you look at the full year, I think we, on orders we are down 12% for the full year and you saw 7% in in the last quarter. I think it will be difficult for China actually to contribute to the revenue growth for next year. We are of course a little bit early to say we think it has good potential to come back.
And because we know that the GDP development last year was 5.2% that they expect 4.7% this year. And that should generate some interesting business for us. China is very focused on technology for the green transformation. Actually you know 70% to 80% of all technologies that are needed for this green transformation is developed and produced in China. So I think we should not underestimate China’s potential going forward.
Ann-Sofie Nordh
Very good.
Jonathan Mounsey
[Multiple speakers].
Ann-Sofie Nordh
Pardon.
Timo Ihamuotila
We’re not giving sort of — I’m sorry. We’re not giving like country specific guidance. So we can’t go there because we really run this division on a business area level
Ann-Sofie Nordh
So then we’ll move to Sean at HSBC.
Sean McLoughlin
Good morning. Thank you for taking my question. Just I’d like to confirm the comments from the press conference about E-mobility that the IPO is now looking unlikely in 2024. Just wondered whether that’s market-driven or if there’s anything else. And I think more broadly on the portfolio, how are you thinking maybe about the divisions that are not yet in growth mode. Any potential to open new areas or divestment? Thank you.
Bjorn Klas Rosengren
Yeah, let me start with E-mobility a little bit. Yeah, it’s correct. I mentioned that on the media call that I would be surprised if we would make the IPO during this year. I think it’s some headwind there in the markets. I think the financial market is not so good at this time, but also some headwind in the market, especially in Europe, Germany, for instance where subsidies has been taken away and many of the suppliers have seen a drop in the market part. So yes, we have some work to do in the organization.
We have taken in investors, as you all know. And I think we have sufficient capital in the company. And I think that business is well in the ABB home. And I think for the time being it fits good in there. And I think we have both resources and knowledge that to make sure that that business will be on top. And maybe next year it could be time to do something. But we need to see some improvement in that business before we feel that that business is ready to go live.
What was it more?
Timo Ihamuotila
There was a general portfolio question.
Bjorn Klas Rosengren
Yeah. Yeah. I mean, first it’s quite clear that the majority of our divisions are today in growth mode. But we also have a number of divisions in profitability mode. We actually just upgraded the last transformational division which was the large motors and generators which is a little bit of a success story that I’m very, very happy for. They really managed to get their performance up and is today double digit profit.
And I think they’re doing an excellent job. It’s quite interesting also because in this whole green transformation project, large motors and medium voltage drives is an excellent combination for these projects. And we had a lot of success lately.
So today we have no businesses really underperforming. Some of the business could do a little bit better even though the businesses they are in are maybe a little bit more challenging than some of the other businesses. But we still have a number of small divisions that we expect an improvement during the year.
But overall I must say last year is a amazing year for ABB. And I really want to underline that. You know when we went into the journey 2020, our objective was to the company should reach 15% profit margin. And we did 16.9% this year and it’s actually the second year over 15%. So I see…
Timo Ihamuotila
Over 15% EBIT, actually this year.
Bjorn Klas Rosengren
Yeah. Actually that’s a good point. It’s not only EBITA, it’s also EBIT above 15%.
Timo Ihamuotila
That was not the target.
Bjorn Klas Rosengren
But I think many and you know ABB is sum of 19 divisions. So if the divisions are doing good, ABB doing good. The central resources in ABB today is the minimum and not going to grow in the future. So the future is going to be the businesses. I just a little bit curious [ph]. I think for me this is a very warm feeling to see that ABB is in in great shape even though markets is getting a little bit tougher.
Ann-Sofie Nordh
And then — thanks Sean. And then we have a couple of follow-ups. Let’s see if we can squeeze them both in. But we start with Sebastian again at RBC.
Sebastian Kuenne
Thank you for taking my follow-up. I have a question on the Red Sea situation. I recall that during COVID ABB stocked up quite a lot on inventory getting early into the market by raw materials and components and people complained about it. And then you basically had very little issues with your supply chain. And it really helped you. And now we have a kind of a comparable situation in the Red Sea. And I was wondering if you are considering also now again restock on certain components from Asia in anticipation of potential shortages.
Bjorn Klas Rosengren
Thank you. Thank you for the question. And it’s correct that we have of course looked into it and we don’t have any material effect, negative effects from the region at the moment. If that is related that we have too much inventory, that could be. But I think for us it’s more important as we are regional self-sufficient. So when we talk about inventory reduction we also source majority of the products from the local market. So there is quite a limited of products and components that are going across the different regions.
If we have a little bit more inventory there it’s not the end of the world I would say. I still think we have a little bit…
Sebastian Kuenne
You are not stocking up.
Bjorn Klas Rosengren
No, we are not stocking up.
Sebastian Kuenne
You don’t want to?
Bjorn Klas Rosengren
No we don’t want to. That is it’s pretty clear. And you saw during the quarter that finally we’ve seen the inventory going down towards normal levels. We are still not there. There is more potential to come. But we have no objective to build big inventory going forward. Absolutely not.
Ann-Sofie Nordh
Okay. Thank you. And we’ll round off this session with the follow-up question from Andre please.
Andre Kukhnin
Hello again. Thank you very much for taking the follow-up. I just want to circle back on some of the comments in robotics from the Street. Firstly the message that China is the biggest challenge. Could you comment on how your market shares evolved across the factory automation and the robotics business?
And secondly just looking at the comments you made on orders in Q4 that were then the overall 32% decline, robotics was minus 16. That obviously implies a substantial 60%, 70% drop for the factory automation. Could you just comment on where is this business now maybe versus 2019 or kind of on other benchmark because I understand there are some pretty substantial prompt effects there. So just want to understand how that’s kind of forming versus what we see and maybe from other automation businesses across the world. Thank you.
Bjorn Klas Rosengren
Let me elaborate a little bit on the robotic market. Yeah, the Chinese market it’s a combination of the global players, some of those international large companies including us there. And I’m sure you’ve seen some of the reports from our peers that everybody is facing the same challenges. The Chinese market is tough. There is also — which we have talked about earlier a number of local players more coming from the lower end market and been growing better in the Chinese market. So yes I think there will be more challenge from local players.
On the other hand our business is very local, I must say. You know we have the R&D in China. We have the production in China. So they are also adjusting products more suitable for the Chinese market, meaning taking some of that more extensive cost out of product. So that is the focus. But I think it’s the overall market that is slow and we do expect that it will come back where we will — we and many of our peers will also benefit.
When we look at the orders…
Timo Ihamuotila
There was a market share question, I think there as well on robotics market share.
Bjorn Klas Rosengren
Yeah, I think the market share, if you look at the international players we feel it’s pretty stable. I don’t think there is any big changes. It’s more related to some of those Chinese competitors coming upwards where we probably lost a little bit of market share.
Timo Ihamuotila
Yeah, but not towards the traditional players.
Bjorn Klas Rosengren
Not in the in the high end market, no.
Ann-Sofie Nordh
And with that…
Andre Kukhnin
Just on that piece on GA, sorry to push but I’m just quite a substantial decline for the discrete.
Bjorn Klas Rosengren
Yeah. Let me let me talk about that a little bit. You know this is machine automation and these are sold to OEM customers. These are the machine builders. So that follows pretty much. But you also know that we had huge issues a little bit more than a year ago when it comes to supply chain. And we build up a big order book to these. So we still have a good order book, bigger order book than we normally have. And I think it’s probably sufficient for a couple of quarters.
But we of course need to see orders during these periods to come in. So we have a good deliveries also for the second half of the year.
Ann-Sofie Nordh
And with that we’re sort of on the hour. So we round off for this time. Thank you very much for joining us and we’ll see you soon again.
Bjorn Klas Rosengren
Bye-bye. Thank you.
Timo Ihamuotila
Bye.
