ABB Ltd
Q4 2018 Earnings Call Transcript

Published: 28 Feb 2019

[Jessica Mitchell:]

Hello, and a very warm welcome to ABB’s 2019 Strategy Update. It’s a great pleasure to have all of you here with us today in Znrich and a very special thank you to those of you that have traveled to be with us today. For those that don’t know me, I am Jess Mitchell, ABB’s Head of Investor Relations. And with me on stage, Ulrich Spiesshofer, ABB’s Chief Executive Officer; and Timo Ihamuotila, our Chief Financial Officer. I am going to hand over to the two of them very shortly to start the program, but before I do that, there are just a few matters I need to run you through. So firstly, on safety, pleased to be advised we are not expecting any fire drills or safety alarms today. So if you do hear one, we would need to ask you to evacuate in an orderly manner. We have a number of fire exits. There’s one to my left and there are three more down to the right of where you came in into the reception area. The gathering point is the MFO Park. That’s a large steel frame structure you probably saw on your way in about 200 meters in that direction, and we would gather there in the hopefully unlikely event. Also today, I would like to draw your attention to the fact that this particular session is being webcast on camera via our website, and that will include the Q&A, which will take us through to the first break. You’ve all received a welcome pack, and in there is a lot of useful information, including how to connect to the Wi-Fi should you need that. I would also like to draw your attention to our Safe Harbor statement, which Uli will show up on the screen shortly. That covers our forward-looking information that you may hear today and which could contain some uncertainties. There will be more information on that in the slide in your handout and on our website. Just a few things about the numbers today. Further to the announcement of the sale of our Power Grids business, all the results you’re seeing today have been recast to show our continuing operations excluding Power Grids, and we’ll show Power Grids as discontinued operations. Timo is going to explain that in a little more detail. This afternoon, when we do our business presentations, all of the information you see there has been illustrated on the basis of our new business structure. So, that leaves only for me to say enjoy the day. We have a very, we hope, interesting afternoon planned for you. It will be busy and hopefully exciting, and the IR team is here if you need any help or assistance, as well as our events team. Please feel free to ask. And, with that, let me hand right over to Uli.

[Ulrich Spiesshofer:]

Thank you very much, Jessica. Welcome to ABB, here in the old factory to experience the new ABB. I’m delighted to see such a big crowd of you here. Thank you for making the effort being with us. This afternoon, we have a really interesting agenda prepared for you. On the one hand, we will naturally share with you the annual results. On the other hand, we will give you an update on the new ABB. Where are we with our planning, where are we with implementation. But, even more important, we’ll let you experience the new ABB in its new businesses. We’re taking the businesses and bring them in front of you. You will see in real life the four business leaders that we have appointed to run these very strong businesses, and at the same time, you will experience in real life some customer examples because we have not only the business leaders here with us that are presenting their business, we have also, from their team four experienced senior business unit managers that will present some very interesting cases that hopefully lets you feel what the businesses are all about and how we are driving the new ABB. After that session, later on, when we have the four business leaders presented, Timo and I will come back here to be with you for a final Q&A session at the end of the afternoon. So, that’s the agenda. That’s what we’re going to do. Let me start by putting this all in context and share with you the agenda – the journey of ABB to date. Where do we come from and where are we today? Over the last more than 100 years, the world has fundamentally changed in many aspects, and the various industrial revolutions have shaped the pattern of the world, and we have been always shaping the pattern of these revolutions with our technology. In the 19th century, we brought electrification and motion to the world to make sure people have power and lighting, to make sure that people in factories can move with our electrical motors. In the 20th century, the century of the industry and industrial automation, we brought industrial automation our leading distribution control systems, our motion offering, but we were also the first to bring robotics to industry in 1974, when we launched our robotic offering initially for the automotive industry, and as you’re all aware, today, we are nicely balanced across different industries. And, today, we all face the fourth industrial revolution. Digitalization is changing the pattern of every single job in the world and especially in industry, and we are right in the middle of it. So, again, ABB has made a move with ABB Ability to support our customers in their competitiveness and in serving their customers with fantastic capabilities to ensure they’re winning in a world that is becoming faster and more competitive. As we have shaped what we’re doing for our customers, we have shaped our portfolio, and have consciously changed the center of gravity from a power and infrastructure-heavy centric portfolio many years ago to, today, a portfolio that is ideally suited to serve customers in digital industries. We were the first to get out of certain infrastructure activities in rail and for certain power generation, and we redeployed the capital in forward-looking technologies and in differentiation opportunities where we can help our customers going forward. So, today, you have an ABB strongly positioned in this field. In 2014, when we launched the Next Level strategy, we said we have the ambition that all of our businesses should be number one or two in the world, and I’m happy to report to you that the team has done a really great job fulfilling that ambition. All of our four businesses today are either number one or two all around the world. Our Power Grids business has been brought back to strength through the transformation that we have been running since the very disappointing situation that we had in 2013/2014. In Electrification, through the start-up activities in e-mobility and data centers, through the deployment of capital in the biggest economy of the world, through Thomas & Betts and GE Industrial Solutions, we have shaped the clear number two globally in Electrification. In Industrial Automation, we just got reappointed number one in distributed control systems, and we have nurtured that position and invested in it to be really the leading front, and we are complementing the historic software capabilities with our strong ABB Ability offering. And, in Robotics and Motion, on the Motion side, the Baldor transaction was transformational for us. It made us the number one in motors in the world. In the Robotics field, in 2008/2009, we had a loss-making business, and today, it’s really a star in the portfolio, growing fast at a high profitability all around the world. So, these four businesses are the result of a conscious strategy where we have focused and where we have invested, and we have driven technological leadership to truly differentiate with our customers. So, the longer journey is clear. Now, let’s put the lens on 2018, and let’s talk about the last year. I can tell you the last year was not exactly a boring year. We had a lot going on, and I’m very happy that we were able to establish a growth momentum in ABB for the first time since a while in a pretty strong way. Orders came in strong, revenue growth that was, for a long while subdued, is coming back, especially in the new portfolio, now developing in a nice way. ABB Ability, which was a vision two and a half years ago, is a reality today and is contributing significantly to the growth momentum that you can witness now. We closed in 2018 the GE Industrial Solutions acquisition, and since then have done a lot of work to integrate it together with the ongoing integration of B&R. In execution, the 10.9% margin that you see is impacted by three special events

[Timo Ihamuotila:]

Thank you, Uli, and ladies and gentlemen, welcome on my behalf as well. Maybe I’ll take this here so that there is no risk for an accident or anything like that. Okay. So, let me start with the key figures for the group for the full year and the fourth quarter. Before going into the actual numbers, however, I want to highlight that based on the announcement of the sale of Power Grids business on December 17th, the results of our Power Grids division are now presented as discontinued operations in our financial information. Our results from prior periods have therefore been recast, and orders, revenues, and operational EBITA results record our continuing operations, and thus exclude Power Grids. At the same time, in line with the guidance provided as part of the announcement, stranded costs related to Power Grids are reflected in the group’s operational EBITA. For 2018, total orders were $28.6 billion, up 8% from 2017, and revenues were $27.7 billion, an increase of 4% for the year. While the full-year 2018 operational EBITA margin was 10.9%, down 30 basis points from 2017, operational EPS was $1.33, up 8% for the year. The group’s total cash flow from operating activities for 2018 was $2.9 billion. In the fourth quarter, orders were up 7% at $7 billion, while revenues increased 5% to $7.4 billion. Operational EBITA margin for the quarter was 7.9%, down 180 basis points. Group cash flow from operating activities remained solid at $1.9 billion. This next slide shows that total orders for the group are up in all regions on a comparable basis. As said for 2018, total orders rose 8%. In Europe, total orders rose 10%. Growth was particularly strong in Italy, with a positive contribution from Germany. The Americas experienced 7% growth, while total orders in Asia, the Middle East, and Africa rose 6%. This was a year of strong performance in both the U.S. and China, ABB’s two largest markets. In the United States, ABB’s total orders were up 7%, and in China, they were up 9%. For the fourth quarter, total orders rose 7%. You can see that the Americas showed 12% growth in orders, led by the United States and very strong growth in Brazil. In Europe, while growth slowed in some core markets such as Germany, overall growth was robust at 4%. In Asia, the Middle East, and Africa, orders rose 7%, with India growing 19% and China up 6%. In China, during the quarter, growth was seen across discrete markets for motors and drives, as well as for robotics, particularly from automotive customers. The pattern across process industries and in construction was more moderate, while demand from rail was robust. Now, let’s take a closer look at the divisions' performance for the full year. As you can see, comparable orders and revenues were up across all divisions, demonstrating solid growth in the new ABB. The operational EBITA margin for Electrification Products was negatively impacted by the acquisition of GEIS. Margins in Industrial Automation were robust, while Robotics and Motion showed strong operating leverage year-on-year. Looking more closely at the fourth quarter on a divisional basis, starting with Electrification Products, we saw continued top-line momentum, with total orders increasing 2% and third-party base orders rising 3%. Electrification Products saw strong growth in its core products business, including for its data centers offering as well as from its process industry customers. Revenues were up 3% year-on-year, and the order backlog ended the quarter up 7% compared to the same period last year. The division’s operational EBITA was 300 basis points lower year-on-year, including the effect of consolidating GEIS, which had an impact of 210 basis points in the quarter. GEIS integration is well under way. While its margin contributed started out a little weaker in Q3, as noted at the time, its overall contribution for Q4 has been in line with expectations. GEIS will now impact the full-year results of Electrification Products for 2019 compared to six months for 2018. Over the course of the year, we aim to offset much of the dilution to operating margin when compared to full-year 2018 margin. However, for Q1 and Q2, we still expect a significant dampening impact from GEIS when compared to the same quarters a year ago, when GEIS was not included. And, let me still highlight that the operational EBITA margin for this division was also negatively impacted by around 90 basis points in the quarter due to contractual charges. Next, we move to Industrial Automation. This was a quarter of continued good order growth for the division. Total comparable orders rose 8%, while base orders were up 4% year-on-year, supported by broad-based growth in orders from pulp and paper, mining and marine, oil and gas demand remained robust. And, B&R delivered another quarter of solid growth. Year-on-year revenues were steady, with strong execution of the order backlog supporting revenue in a seasonally quieter book and bill period. The division ended the quarter with its backlog 2% higher year-on-year. The operating margin year-on-year was down 200 basis points against a tough comparison base and reflects a one-time charge of approximately 80 basis points due to payment default by a customer. As previously noted, and similar to what we now have seen in the fourth quarter, we would not expect the IA margins tailwinds that we had in Q1 2018 to repeat themselves in Q1 2019. Looking now at Robotics and Motion, which delivered strong growth and execution in the quarter, total orders grew 11%, while base orders grew 6% compared to the same period last year. The division won large orders from the automotive and rail sectors, while experiencing continued demand from process industries customers. Revenues experienced strong growth, increasing 11% on good execution of the order backlog and continued book-and-bill activity. The order backlog at the quarter end was up 10% year-on-year. The division delivered a year-on-year increase of 120 basis points in its operating margin, reflecting positive volumes and ongoing focus on cost management. Turning then to group operational EBITA margin, here, we can see the most material impact summarized for the full-year and fourth-quarter periods. As noted earlier, our reported margin of 10.9% for the full year and 7.9% for the quarter were affected by stranded costs related to the transfer of Power Grids to discontinued operations. Stranded costs are services provided by the Power Grids group that do not qualify to be reported as discontinued operations. These services include IT, real estate, and other shared corporate services. We expect a vast majority of these costs to be either transferred to Power Grids or to be eliminated by closing of the sale of the majority stake in Power Grids to Hitachi, which is anticipated in the first half of 2020. For the full year 2018, ABB recorded operational stranded costs of $297 million, and in the fourth quarter 2018, stranded costs amounted to $72 million. In addition, charges and costs associated with the ongoing wind-down of our non-core business, now further accelerated by the sale of Power Grids as well as the expected dilution of GEIS, impacted periods shown. Combined, these factors affected operational EBITA by 250 basis points for the full year 2018 and 400 basis points in the fourth quarter. This next slide shows the bridge between our group operational EBITA margin for Q4 2018 and the same period in 2017. In this instance, both periods include stranded costs of around $72 million due to the recasting of our results, so this does not give rise to a variance here. Addressing the key year-on-year drivers, we continued to deliver net cost savings amounting to $31 million. This was supported by our ongoing focus on supply chain management and productivity. These savings were partly offset by negative impacts of $15 million from rising raw material costs. Volumes had a positive impact, contributing $110 million, partly offset by mix, which had a dampening effect of $23 million. Our investment in growth continued, including an increase in investments of $29 million year-on-year. Non-core business had a net negative impact of $70 million, while other shows a negative impact totaling $92 million, including the contractual charges in Electrification Products and the one-time customer payment default in Industrial Automation. Here, we have broken down the net income drivers to show very simply the changes that have taken place following the announcement of the sale of our Power Grids business and the simplification of ABB. Non-operating items reflect the continued implementation of normal restructuring programs within our continuing operations and around $65 million of restructuring costs associated with the beginning of ABB’s simplification actions. Further, $25 million of Power Grids-related transaction and separation costs were recorded in Q4. The results of Power Grids activity is reflected in the $135 million net income reported as discontinued operation. This result is net of restructuring costs within Power Grids and ongoing investment in Power Up transformation program. So, in summary, ABB’s 2018 results show solid growth, with orders and revenues up in all regions and all divisions. Margins were impacted by stranded costs, non-core charges, and GEIS dilution, while cash flow from continuing operations was solid. Thank you for your attention, and let me now hand back to Uli.

[Ulrich Spiesshofer:]

Thank you very much, Timo. So 2018, a year where we had enhanced growth and redefined the transformation of ABB into a leader in digital industries. Just before Christmas, we announced three decisive actions to do this

[Timo Ihamuotila:]

Thank you. Thanks, Uli, and let me move to the financial mirror then. So, let’s discuss the CFO’s perspective on the value creation in the new ABB. We want to continue to move ABB toward better quality of revenue to drive profitable growth and improve capital efficiency and we have certain principles on how we plan to do it. We want to be bigger by profit and free cash flow, not necessarily by revenue, and I think our planned PG exit is testament to that. We want to take a systematic long-term approach and we want to drive high-performance, high-integrity culture in line with our values. And, this is where the ABB operating system common framework comes into play from the CFO perspective. As Uli said, ABB operating system will define how we will do things in the new ABB. First it will define what we do in the corporate and second it will define what will be done in the four businesses, i.e., ABB operating system will define the boundaries within which the business in ABB can freely operate and when these boundaries are few and clearly defined businesses will have the entrepreneurial freedom to operate with the right clock speed focusing on delivering results. This gives clear management processes for both corporate and the businesses. So what will change? For example after we discontinue the matrix, our businesses will take control of about $1.5 billion of cost which was earlier allocated to them. After the change is complete the allocated cost is planned to go down from about $1.8 billion to about $300 million. At the group level, we will no longer have any supporting business functions in the matrix structure, neither centrally nor in the countries. At the corporate level, ABB operating system will lead to a balanced approach on driving the right KPIs for execution. And again from a CFO perspective, this will include processes for financial planning, differentiated KPIs by business, portfolio management and capital allocation. And I will talk more about this framework with the coming slides. As discussed earlier we want to systematically move ABB toward better quality of revenue. We target more exposure to markets with strong secular growth drivers with channel structures supporting higher margins and with business models benefiting from high-ABB value add. And we do this systematically using our PIE model for penetration, innovation and expansion. In addition to PIE, we use portfolio management, partnerships, like the one announced today with Dassault, and ABB technology ventures to drive growth. In line with this framework we have divested cables bought B&R, are in the process of exiting EPC business and Power Grids just to name a few examples. And we also have some proof points. ABB’s ordering growth was 8%, and organic revenue growth was 4% in 2018 in the new setup. We ended the year with an annual book-to-bill ratio of 1.05x, the highest annual number since 2014. We also consistently try for stickier revenue – for example, by higher service revenue and by new ABB-as-a-service business models, and my colleagues will talk about this more in the afternoon. ABB continues to invest in organic growth using its PIE framework. For any technology company, $1.00 of fixed-cost investment should go either to R&D or sales investment whenever possible. You can see here that we have increased our R&D investment and we continue to target over 4% of revenue going to R&D, including ABB Ability. You also see that we have significantly reduced our G&A from 2017 to 2018, while increasing investment in sales and this has been possible by tight management of functional costs like information systems, HR and so forth, but also on a very tight grip on discretionary spend. We intend to drive this trend going forward as well as part of the ABB operating system. Let’s then discuss ABB’s cost base and cost execution. We are targeting sustainable cost reduction in four steps, given the divestment of Power Grids and EPC business model exit. First, on run rate basis, we expect to eliminate the vast majority of about $300 million of stranded cost by deal closing and a significant amount by end of 2019. Second we are no longer expecting any orders for revenue in the non-core business going forward. Non-core business had about $290 million negative impact on ABB’s operating EBITA margin in 2018. For 2019, we expect this impact to be clearly lower. We expect to fully ramp down non-core business by the end of 2021. Third we continue to drive the 3% to 5% running cost reduction to compensate for pricing pressure and cost inflation in the market. And fourth, with simplification of our business model, we target $500 million of cost savings medium-term on a net basis. Let’s then look at these cost components in a bit more detail. We continue to drive gross margin improvement and also continue to target the 3% to 5% cost-out from cost of goods sold annually. Our key measures for this are dynamic pricing strategies, particularly in EP and Motion business, managing input cost very tightly with clear net cost-reduction targets; and driving quality and efficiently through Lean Six Sigma, and focus on requested on-time delivery. With the ABB operating system simplification, central resources and quality and operations will move to businesses when we eliminate the matrix. This will allow our businesses to even better integrate and optimize end-to-end demand supply management. Since our December 2017 announcement, we have done further work on the $500 million net cost savings. Let me first describe what we mean by net savings as an example. So, from 2017 to 2018, our total IT cost went down by $30 million. In other words, absolute cost was $30 million lower. This, however, does not always mean that the savings would automatically drop to bottom line, as we need to also manage market pricing and invest into organic growth. We have, however, a very good grip on the levers, and as said earlier, we expect the $500 million net cost savings to be a significant contributor to ABB to operate in its new operational EBITA margin target corridor of 13% to 16%. And, there is also a very important principle which Uli touched upon – the pull-down by business principle. When we discontinue the central and country functions, we will not push these to our businesses. Our businesses will pull or take costs and resources they want to have. The remainder will be restructured by respective functions through a job pool that prioritizes the recognition and redeployment of our talented employees. This way, businesses can fully focus on business execution. On the $500 million cost savings we currently expect group functions and corporate-level savings to be approximately $200 million and business-level savings to be approximately $300 million. We also announced today as part of our results that we expect to have about $350 million of restructuring costs related to the program and approximately $150 million implementation costs, in line with our earlier expectations. These costs are expected to be below the line. Let’s then talk about execution timeline. We expect to achieve $150 million to $200 million run rate savings by end of 2019 and the full $500 million of run rate savings during 2021. And naturally, when we implement the program, we continue to drive to as much further simplification and efficiency as possible. An important part of ABB operating system will also be materially leaner corporate structure. Medium-term, we target to reduce the corporate and other cost line item in our P&L to approximately $300 million. This will happen by stranded cost elimination, by exit from non-core business, and by focusing corporate activities to only a few areas. These are ABB Ability and artificial intelligence on the R&D side and central corporate processes, such as finance, strategy, and communications. All other activities will be in the businesses. To be clear, our target is to ramp down non-core activities by end of 2021, so there can still be some impact from non-core business during that year. And also, as stated in the appendix, we expect corporate and other costs to be approximately $800 million in 2019. In the new setup in the medium term, we expect Electrification products to operate in 15% to 19% operational EBITA margin corridor, Industrial Automation in 12% to 16%, Motion in 14% to 18%, and Robotics and Discrete Automation in 13% to 17%. Combining these medium-term target margin corridors with the new corporate cost run rate of approximately $300 million is well in line with the new medium-term ABB Group target margin corridor of 13% to16%. I’ll now summarize the P&L side of things before moving to portfolio and capital allocation. On the operational EBITA average, you can see that our 2018 starting point is 10.9%. As discussed earlier in the results presentation, this has a combined 250-basis-point impact from stranded cost, non-core business, and GEIS integration. We will drive further performance improvement from our $500 million net savings program and from business performance optimization, including targeted improved operating leverage in our Electrification and Motion businesses in particular. Overall, we think we have the right levers to operate medium-term in our new 13% to 16% target margin range. I will then talk a bit about how we manage our portfolio and how we allocate capital. Naturally, portfolio management is not new framework for ABB. The company has been using a portfolio management approach when shifting its center of gravity for many years. However, as part of ABB operating system, we are launching a modified framework. This framework is based on both strategic attractiveness of the business as well as our business performance. This picture shows examples of our businesses mapped to this framework on an illustrative basis, including the cable business, which we exited, and B&R, which we have bought. Another example in the growth leader category would be our Robotics business. Naturally, we would like to have businesses where both market attractiveness is good, our ability to win is strong, and they support the core. Or, alternatively, if the market is mature, we have a very strong position to drive high profitability and cash generation. But, it’s clear that we also have businesses in review and transform categories. At the moment, we have approximately $3 billion of revenue in the review and transform categories under special improvement programs, including GEIS. We expect meaningful margin improvement for ABB medium-term as we look to manage our portfolio and move such assets either out or to a better place in our portfolio management framework. Also, we plan to move businesses in this matrix toward even more differentiated performance KPIs so that we further enhance and optimize our capital allocation. Let me next talk a little bit about the inorganic side of portfolio management. We continue to have a clear criteria for value-adding acquisitions. We have clear financial hurdles, we look for good strategic and cultural fit, as these are very important for long-term value creation, we have a predefined decision-making framework and approval process, and finally, we want to make sure we have good management capacity to integrate and drive rigorous follow-through of each acquisition business case. We have also taken a look at acquisitions and divestiture track record during the last years. It is clear that there are learnings we can take in the speed of integration, in the way we execute integration, as well as carefully assessing market timing. However, when we look at GEIS and B&R, they are tracking well against the set targets, and the cables divestment was also a very successful transaction for ABB shareholders. On capital efficiency, exiting Power Grids will have two impacts. First, on fixed assets, our CapEx will be proportionately lower after Power Grids exit, as Power Grids is a more capitally intensive business than the ABB average. The same is true for networking capital, as Power Grids has recently been using more networking capital compared to sales than other ABB businesses. So, the overall Power Grids exit will be slightly positive to ABB ROCE. This is driven by proportionately lower CapEx and networking capital having a positive impact, partly balanced by negative impact due to the fact that Power Grids has proportionately less goodwill than ABB average. Turning next to capital allocation, you can see our priorities remain unchanged and consistent with a strong record of cash generation. Our first priority for available cash is organic growth that achieves attractive returns on investment. Second, we are firmly committed to a policy of rising sustainable dividend. Third, we will continue to look at value-creating acquisitions in a disciplined way. Lastly, we look to return additional surplus cash to shareholders through the mechanism of buybacks, balancing this against other priorities. Our target capital structure includes our commitment to maintain a single-A credit rating in the long term. In the 2014/2018 period, we allocated approximately 60% of capital to shareholders through either dividends or buybacks. We intend to continue to deliver strong returns to our shareholders. And finally, before I hand back to Uli, a couple of words on the year ahead. In the appendix, you can find the usual guidance framework for 2019 and next quarter across some of our key financial items, as we said in our outlook statements in today’s results press release. So, macroeconomic signs are mixed in Europe and trending positively in the United States, with growth expected to continue in China. The overall global market is growing, with rising geopolitical uncertainties in various parts of the world. Also, we are driving a big transformation. Against this backdrop for 2019, we aim to continue revenue growth in this environment of rising uncertainties. We expect our operational EBITA margin to improve, aided by non-core improvement, stranded cost elimination, and our simplification progress and program. GEIS integration will be a headwind for full year 2019, and we anticipate solid operating cash flow generation for the new ABB. And, with that, thanks for your attention. I’ll hand back to Uli, who will close on a group view.

[Ulrich Spiesshofer:]

Thank you very much, Timo. So, Timo shared with you the financial perspective and the mirror of our strategy in numbers. You see there’s a lot going on on the one hand, but on the other hand, there’s also tremendous value creation potential. Now, how will we tap this, and how will we deliver, and what will be the focus this year? This year, we’re going to do two things. On the one hand, we will run the company for continued profitable growth, and on the other hand, we will manage the transformation in line with what I just shared with you. We will use our PIE approach to drive growth, we will deliver the value from our investments, and we will continue to focus on execution because, as I said before, there’s still room for improvement, and we will continue to focus that in a humble way. We will not lose out on the business-led collaboration opportunities in joint account management to drive profitable growth in ABB and continued focus on that. And, at the same time, we continue the separation journey of Power Grids. We will implement the simplification, and as you have seen in Timo’s presentation, which is quite fundamental, and we will shape up our new businesses and support them that really go out in the market and are even more successful than they have been so far. With that, I would like to stop the presentation and hand over to Jess to facilitate our Q&A session.

[Jessica Mitchell:]

Thanks, Uli. So, we will now have a short Q&A session for about 15 minutes. There will be a chance later and all through the day to ask questions, and when we wrap up at the end of the day, so we would like to ask in the interests of time for this session that everybody just limits themselves to one question, and if you could please state your name and company before you ask your question, thank you. So, we’ll have the first question here from Martin in the front.

[Martin:]

Thank you. It’s Martin from Citi. My first question is on – I’m sure you’ve done a benchmarking process on your margins as part of this, and also, we had the group margin target beforehand, and now we see the divisions. I think some people will be surprised that your Motion target is probably higher than people thought, but your Robotics and Discrete targets are probably a little bit lower. Now, I know that peers have quite wide ranges – a lot of mix effects in there, and so forth – but if you could just a little about how you see those businesses and their targets relative to the peer group. Thank you.

[Ulrich Spiesshofer:]

We had a bad outstanding, which would be one of the biggest surprises, and we were very clear that the Motion target and the Motion actual performance and the Robotics actual performance might be a surprise to one or the other. On the Motion side, Morton will later on – our new leader of the Motion business will later on describe to you our business model and our way how we differentiate. We make really good money in this business by providing unique customer value. It is not a standard copper and iron business. It is a business where digital value proposition with ABB Ability to do remote condition monitoring, our global service network, true scale that we have – we are double the size of others – come together with a very strong domain expertise and deep understanding of what the customers really need. So, we are really uniquely positioned in our unique technology with the most energy-efficient motors and drives. Very often, when you buy this product, the payback time might be less than six months. It’s a great business to be in, and ABB is very strongly positioned. If you benchmarked it – I would agree with you that the ambition there is significant, but it’s built on our unique proposition, and it’s built on our historic track record of running this business together. Now, if I go over to Robotics and Discrete Automation, mind you, there are two building blocks. There’s B&R that came into ABB last year with about an 11% operating margin, and there’s Robotics, where most of the competitors are – at the moment – struggling to have solid single-digit margins. If you combine these two businesses with a significant growth, I think we see here a business where significant amount of monies are redeployed in innovation leadership. There is a reason why we are leading with YuMi. There is a reason why bottling companies all around the world choose B&R for automation – because we continuously invest in innovation. And, the specific pattern of success in both businesses has been put in when we decided the target margin range for these businesses. So, that’s the background of it. We naturally also benchmark. You can imagine also with our board, we do regular benchmarking. We just had a board meeting yesterday. We went through a quite deep set of benchmarks, and if you take the Motion piece, if you take the Robotics and Discrete Automation piece, we feel with that target margin range combined, with the exciting growth that we delivered and have been delivering, we are quite well positioned.

[Timo Ihamuotila:]

A quick comment we need to take into account as well – taking corporate to $300 million will have a bit of an impact, so that’s an important component, and then also, as Uli said, we will look to more differentiated KPIs, so if you look at Robotics and Discrete, we might have a little bit more growth there, and if you look at IA, we might have a little bit more ROCE there going forward, so these are some of the things what we are now working on moving forward so that we really drive best possible returns for our shareholders.

[Jessica Mitchell:]

Okay. We have one at the back there.

[James Moore:]

Hi. It’s James Moore from Redburn. Just a question on the future pricing pressure of the company. In the past, with Power Grids being a more commoditized business, you’ve had a lot of pricing pressure. Now that we take that out of the corporate structure, one could argue that the pricing power of the company is improved. I guess that’s reflected by the net savings line of the bridge, but when you look at that net savings over the last few years in the continuing group compared to the old group, can you help quantify or give us some flavor as to either the gross pricing pressure or the net pricing pressure and how it’s improved by the change in structure of the company – or whether it is or isn’t?

[Ulrich Spiesshofer:]

I will start and then hand over to Timo. Our ambition is to truly differentiate through our customer value proposition – in the four businesses that we are shaping for the future, we have the key to do so in all four of them. When you go to a customer that runs a hospital and you have a continuous, reliable electrification solution that’s ahead of all the others, you can get paid for that, and you get paid very well. If you combine it – and, Jean-Pierre Offricio, who sits – where is Jean-Pierre? He was running our business in that space and electrification. He’s also running probably a world-class lean Six Sigma operation down in Italy and in sites all around the world to serve the customers. So, the combination of true differentiation with strong operational excellence is very good. I would agree with you that the commercial quality of the new ABB excluding Power Grids is enhanced through the move, and I would also clearly state that in the last couple of years, we have fundamentally changed the business model in quite a couple of areas to really be in a position where we are. I’ll give you an example. We had in 2008/2009 a strategy to sell the cheapest kilogram of robots. Today, we sell a robot with a purpose where the solution defines the customer value and where we can partially harvest more customer value also in our commercial setup. So, there is always price competition out there, but if you differentiate with a conscious choice on a business model, you might have the opportunity – and, that’s what we’re still aiming for – to have good-quality commercial profile.

[Timo Ihamuotila:]

Exactly. So, as we spoke about the better quality of revenue, as Uli said, market, channel, and business model, but if we then dig through the numbers – so, we have $31 million of the net cost savings in Q4, which was lower than we have had during some other quarters this year, and this number is an absolute number, so earlier, it included some Power Grids impact as well. So, we need to take that into account. And, the second thing impacting here is that we were still riding the tail end of the WCP program this year, and that came in a bit more front-end-loaded because now we are really at the tail of that program, so that’s the main impact now on the short term.

[Jessica Mitchell:]

Okay. Daniela in the front here.

[Daniela Costa:]

Hi, good afternoon. Thanks for taking my question. I wanted to go back to the partnership with Dassault Systemes and into the rationale and the thought process you went for ending up with a partnership in comparison with, I guess, some of your competitors who either decided to fully own PLM or to just have equity investments – so, just the rationale behind that. And, I guess, related also to the partnership, you have the positioning on the portfolio versus your peers on your direct portfolio. Can you tell us on your plus the partnership where you stand, what’s the pluses and the minus? Thank you.

[Ulrich Spiesshofer:]

Thank you very much for your question. You might remember when we launched Next Level in 2014, we said clearly that partnerships will be one of the patrons of ABB going forward because we said we want to focus ourselves on positions of strength, and we want to combine other people or other players' strength for unique customer value propositions. The partnership with Dassault is about two things. It’s about customer value and making money. If you look in the space of soft industrial software at the moment and if you look at valuations, we would have needed to deploy a lot of money to get the same-quality customer offering for our customers as we have now through the partnership. So, we have made a conscious choice – and, by the way, that’s mutual on the Dassault side and our side – Dassault has a clear ambition to stay independent. If you understand the ownership structure and the family behind it, it’s very clear, but they have the ambition to create tremendous value to customers, and that’s what we’re doing jointly. And, we have basically figured out a triple business model where we sell through Dassault, Dassault sells through us, and we sell jointly for certain customers, and we are ramping that up at the moment. A unique element of this partnership also is the open standards that we both believe in. Both companies – Dassault and ABB – believe in open standard. We have been for decades in an open-standard technology setup; Dassault does the same. If you take the combined capability and benchmark it against others, there is, at the moment, three players that are doing something combined between PLM, CAD, CAE and conventional industrial automation. There’s an American one, there’s a German one, there’s now ABB. I would say the combination of the world market leader, which Dassault is, with the ABB strength positions us very well in the competitive environment. Our install base, our strong capabilities is good, and there is nobody else out there at the moment that combines robotics with PLM, automation, and digitalization. So, we’re kind of playing this with a unique hand, and as I described before, in the customer example that we have in North America in an aircraft plant, when you look at what we can do together by integrating, for example, the PLM, CAD, CAE solutions with our RobotStudio solutions to drive paint shop efficiency on aircraft painting, it’s really mind-boggling. We are very well positioned. We are humble enough to appreciate others that are also competing. If I look at the market share gains that Dassault has demonstrated in the last 12, 18 months, I think we’re betting on the right horse as a partner.

[Jessica Mitchell:]

We’ll take one from that side. Is it Ben that I can see there? Yes.

[Ben Uglow:]

Hi. It’s Ben Uglow from Morgan Stanley. I wanted to see if I could sneak in two quick questions. I wanted to pin Timo down on all of these stranded costs, legacy costs, so many costs. If I look at the margin impact – the dilution in 2018 is basically 250 basis points, and you’re doing a 10.9% margin. By 2020, is it correct for us to assume that all legacy non-core stranded costs in GEIS will basically be gone? So, no comment here around savings or anything else, but all of those – let’s call them one-off effects – should be eroded by 2020, and therefore, by my calculation, in theory, all else equal, we should be at a 13.4% underlying margin by 2020. So, is my assumption there correct?

[Ulrich Spiesshofer:]

That’s a good one.

[Timo Ihamuotila:]

So, we’ll go now first, and then you had a second one if you get a chance. So, the answer to that is no because I actually said even in my prepared remarks that we expect to ramp down non-core business by end of 2021, and there could be still some impact from that. The answer on the stranded cost is yes because that needs to be done by deal closing, and GEIS follows the path which we have described earlier. We expect to be back in the target margin corridor in electrification during 2020.

[Ben Uglow:]

Just remind us what the residual non-core is in 2021.

[Timo Ihamuotila:]

That, I cannot comment at this point in time.

[Ben Uglow:]

Is it significant or not?

[Timo Ihamuotila:]

As I said, I can’t comment at this point in time.

[Ben Uglow:]

Okay. And then, very quick one for Ulrich – nice chart there talking about acquisitions. You called out deliberately slow integration of Thomas and Betts. Why did you mention that, why has integration been slow, and is that a factor right now in the EP margin?

[Ulrich Spiesshofer:]

Look, when you do M&A – and, we have done a lot, and you might remember when I came in as CEO, we had a whole portfolio of acquisitions that were done at a rapid pace, and integration was at various stages of maturity. We’ve got to just be honest and tell you what we faced. We have the good, the bad and the ugly when you do that. And Timo and I – Timo has not been around as long as I have been, but I have bruises all over my body learning what it takes to do a successful integration. We have done some wonderful integrations that I’m really proud of, but we have also paid a hard price trying different approaches. We had a software integration approach with Mendix, which was a portfolio of different software activities where the no-touch integration approach failed, and we did not create the value that we wanted. We had in Thomas & Betts a high level of respect for the very strong distribution-oriented install base, the relationships we had there, and therefore, we said let’s be a little bit cautious on that one and we got caught on it. We did not deliver what we should have delivered in the full value creation story. We have some others, like Baldor, or B&R, or what we’re doing on the divestiture of cables – I think it was the right call at the right time in the right way, and when you do this amount of different portfolio moves, it is important for you to understand that on the one hand, it’s bad news, we didn’t do it all right, but there’s also good news – we can still fix it – and yes, the Thomas & Betts situation is also an opportunity in the EP space to do even better.

[Jessica Mitchell:]

Okay. We’ll take one over here on this side of the room.

[Alexander Virgo:]

Thanks very much. It’s Alexander Virgo, Bank of America Merrill Lynch. Could you just talk a little bit about the incentives and KPIs that you’re using to manage down for the business units or the division leaders to manage down those central costs? And, perhaps I think – if I listened to the media call correctly this morning, you talked about a hiring freeze. Maybe you could expand a little bit more on the employee development with respect to that 15,000 FTEs. Thank you.

[Ulrich Spiesshofer:]

Thank you very much for your question. Let me first lay out the principles how we pay people today and how we used to do that. We used to have a socialistic approach where 70,000 people got paid on the same group scorecard in the STI. These times are over. We have changed the compensation system and we have made it more performance-oriented. There’s always one third of the compensation is one level up and two thirds of the compensation is direct line for the short-term incentive. This short-term incentive compensation contains financial elements, but also, for example, at the moment, for 2019 in the scorecard, a transformation element for everybody in ABB where every line superior will charge how the person has contributed in the transformation in the specific role that person has in the transformation, a business leader to get the right kind of pull momentum, getting the resources and getting the business operational, a functional leader, supporting with the right guardrails for the future setup, and helping to get moved, a country manager getting paid on the pace and the support level that he or she provides to the transformation on the country level. So, we’re making this a direct element not only of the performance setting, but also of the compensation. And, it’s basically a team sport exercise where we pay in a granular way for a common objective that is brought down to individual accountabilities and responsibilities, and mind you, you have also seen the change in our long-term share-based compensation. It was changed towards a mix of TSR and EPS, and it’s relative TSR, so if we do well, we get paid on that one, if we don’t, we don’t get paid on that element. So, it’s really a fundamental change in ABB’s pay philosophy over the last couple of years, moving from an entitlement commonality-driven approach to an individual performance approach that still has the right aspects of team management in the portfolio.

[Timo Ihamuotila:]

May I comment? Justin, the function, of course – this is simply driven by one net number. So, its functional cost owner has a number they need to hit, and of course, we have to set that number in a fair way and in a way that it’s possible, thinking through the investment priorities and all that, but fundamentally, the system needs to be such that if you are a cost owner only – like I am in many areas – you just have one number.

[Ulrich Spiesshofer:]

And, on your employee question, I’m proud of the team. I’m really super proud of the team. If you look at all the people here in the room that are serving you, we announced the biggest change in the company’s history just before Christmas, and the people are doing a great job supporting it. They live their responsibility. We took a lot of time communicating and sharing why we are doing it and what everybody’s individual role is, and we are not done with that. We are continuously out there. The next two and a half weeks, I will be gone in Asia and the U.S., being with the teams and getting out there. Timo will be in China, I will be in Hong Kong, and then we go to different parts of the U.S. and do that. So, it’s really a team sport exercise, but I would say the employee morale and the employee commitment to be part of that one is amazing. They have also seen that with our decision to pause the external hiring and do an ABB-first approach, we do whatever is possible to give our people reference. We had a half-day meeting with the European Works Council, working through how we can engage there together, as we have done previously on large-scale changes, because this is not the first time that we are changing, and we do it as a responsible way. If you look at – there’s about 15,000-plus people impacted. We hire about 10,000 people a year. I’m cautiously optimistic that a majority of the situations will be resolved in a very amicable way.

[Jessica Mitchell:]

Okay. Thank you, Uli. I’m going to stop it there for the moment. There will be more chance later in the day. Thank you for your patience on that. So, I need to now tell you what happens next. We are going to take a short, 10-minute break, and then we’re going to start the afternoon sessions with the presentations from each of our four businesses. So, we have split you into four groups. On your badge, you will find a number – one, two, three, or four – which assigns you to a particular group. It will be quite important, please, that you stay with your group throughout the afternoon. In the caging area, there will be members of the events team waiting, holding up a big placard with the number one, two, three, or four, so I need you to find the person that is holding up the same number that corresponds to the number on your badge, and they will then lead you through the breakouts, which will each be about 14 minutes, and they will go counterclockwise throughout various areas for the business presentations, but there will be people to lead you on the way. When you get to the first breakout, you will find on your chair a headset. Could you please take that headset, keep it with you for the afternoon, and take it with you to each session after the first one? So, hopefully, all of that was clear, and everything will go very smoothly. Enjoy the rest of the afternoon.