ABB Ltd. (ABB) Q4 2021 Earnings Conference Call February 3, 2022 4:00 AM ET

Company Participants

Ann-Sofie Nordh – Head-Investor Relations
Bjorn Rosengren – Chief Executive Officer
Timo Ihamuotila – Chief Financial Officer

Conference Call Participants

Ben Uglow – Morgan Stanley
Alex Virgo – Bank of America Merrill Lynch
Andreas Willi – J.P. Morgan
Martin Wilkie – Citi
Phil Buller – Berenberg
Guillermo Peigneux-Lojo – UBS

Ann-Sofie Nordh

Greetings to all and welcome to the Presentation of ABB's Q4 Results. I am Ann-Sofie Nordh, Head of Investor Relations. And next to me here I have our CEO, Bjorn Rosengren, and our CFO, Timo Ihamuotila. And like always they will take you through the presentation after which we open up for Q&As.

But before we begin I would just like to draw your attention to the information regarding the Safe Harbor notices and our use of non-GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward-looking statements and these statements are based on the company's current expectations as certain assumptions and are therefore subject to certain risks and uncertainties.

And with that, I will hand you over to Bjorn and Timo for you guys to talk through the slides. Please, Bjorn.

Bjorn Rosengren

Thank you, Ann-Sofie, and warm welcome from me as well. Before we go into details of Q4, let's take a look at the full year. And it was a good year for us when we made progress in virtually all aspects. Financially, we increased the operational EBITDA by 37% excluding FX and we improved the margins by 320 basis points to 14.2%, which puts us on a level we haven't seen in recent history. This improvement was supported by high volumes, strong pricing execution and operational efficiency. We saw strong demand across most customer segments and regions. After a strong first half of the year, we experienced during the second half increased headwinds from raw materials, supply chain disruptions and cost inflations. But our business has managed to successfully offset these negative impacts and we delivered a strong year and a clear path towards our 2023 targets.

I'm even more happy about the cash flow, which increased by 78% to $3.3 billion, strengthening our balance sheet to a net cash position. This is an excellent achievement. Besides good financial performance, we continue to execute our portfolio environment in line with our purpose. For example, we sold the Mechanical Power Transmission business for $2.9 billion, or more than 22x EBITDA. This may be the highest price ever paid of mechanical business. This year we also kicked off the systematic development of our 2030 sustainability agenda with an updated governance and leveraging our performance management process.

We are already driving progress across all strategic pillars. The improving financial performance enabled us to propose a dividend of CHF0.82. This is up 2 cents from last year. Our balance sheet is strong and this dividend proposal still allows for financial headroom’s to grow through acquisitions. We will also continue with our share buybacks also in excess of the PG capital return program.

Now let's shift focus from the full year and look at the Q4 on Slide 4. In Q4, we saw high level of customer activity in virtually all segments. Demand increased for our product businesses as well as our project and service. Orders increased by 21% and this despite that we booked a lower level of large orders compared to last year. As you see in the chart, there are absolutely level of 8.3 billion is the highest quarter since Q4 2019. Comparable revenues increased by 8%, a bit stronger than we initially expected as we managed to deliver some projects late in the quarter. That's it. We could have delivered more if it had not been for the supply chain disruptions. This includes component shortages as well as strained logistic and tightening labor markets. In total, book-to-bill was 109% resulting in an order backlog as high as $16.6 billion, up by 21% year-over-year.

Now let's take a quick look at the different regions on Slide 5. Excluding the impact from large orders, we saw a strong double-digit growth in all three regions. In Americas, the important U.S. market increased by 46% supported by all business areas. In Europe, most of the top 10 markets improved by strong double-digit growth rates. Growth in Italy was impacted by the high comparables from last year when a large ordering process automation was booked. At AMEA regions declined overall by 2%. This drop is again related to large orders received last year. Generally speaking, we saw positive development in several important countries, including and grow order growth of 14% in China.

Let's turn to Slide 6 and our earnings outcome. We achieved 20% increase in operational EBITDA and we improved the margins by 160 basis points to 13.1. The strongest Q4 margin reported since at least 2017. Excluding the higher special charges last year, the margin improved by 80 basis points. This was driven by good step up in PA and RA. Electrification maintained its gross margin, but the operational EBITDA margin declined on mainly higher sales costs. The margin decline in motion was mainly due to the divestment of the high margin business, Dodge.

And with that, I hand over to Timo to take us through the numbers in more details. So, Timo.

Timo Ihamuotila

Thank you, Bjorn, and greetings to everyone also from my side. And as usual, let's start by taking a closer look at electrification, which continued to see strong demand across virtually all customer segments. Momentum was particularly strong in E-mobility business where orders were up over 150%, but also areas like food and beverage, buildings and renewables were clearly strong. In total, comparable orders increased by 20% to $3.6 billion, which actually is one of the highest levels on record for electrification.

Looking at the different geographies, we saw strong double-digit growth in both Americas and Europe while AMEA declined slightly, including a mid single-digit decline in China on relatively high comparable from last year. Comparable revenues improved by 4% and this was mainly on the back of a strong pricing execution. Volumes on the other hand continue to be hampered by supply chain disruptions, including some component shortages and also a tighter labor market. Consequently electrification enters 2022 with a record high order backlog of $5.5 billion to execute. That said, we foresee the supply chain challenges to persist at least in the near-term.

Taking a step back and looking through the COVID turbulence of 2020, comparable orders and revenues are now up 16% and 8% respectively compared with Q4 2029, a strong performance by EL in this period, and clearly above its historic growth trajectory. In the quarter, electrification faced significantly higher raw material costs compared with last year when favorable hedges were still in play. We were able to offset the higher input costs with strong pricing execution, but cost inflation due to the tight supply chain and higher sales costs resulted in an overall decline of 80 basis points in the operational EBITDA margin. Looking ahead into the first quarter, we expect a higher comparable revenue growth and margin to remain broadly similar compared with Q4.

Let's move on to motion on Slide 8. First of all, I just want to remind you about as closing the divestment of Mechanical Power Transmission division, or Dodge as we call it, on November 1st. This of course means that charge and numbers for motion include only one month of contribution from Dodge, which we sold for $2.9 billion in cash. The non-operational gain of $2.2 billion is included in income from operations. The comparable order growth, which adjusts for structural impacts like the divestment increased by 29% and reflected strong demand across the customer segments and regions. Orders grew double-digit in both the short and long cycle product businesses and service was up by 11%. As a headline number, the 70 basis points decline in operational EBITDA margin is surprising given that comparable revenues were up 9%. The majority of the margin decline meaning about 50 basis points was actually due to the divestment of Dodge, which had an above BA average profitability.

The additional slight margin pressure was due to both divisional mix as well as increased raw material and freight costs, which offset the positive impacts from higher revenues and efficiency measures. For the first quarter, we expect similar comparable revenue growth and the margin to remain broadly stable or slightly increased compared with Q4.

Turning to Slide 9 and Process Automation, where demand continued to recover across the process-related industries, including oil and gas and cruise while the Power Generation segment remained stable. It's worth pointing out that the flat headline order growth was impacted by a high comparable from last year. Excluding large orders, meaning orders of more than $15 million in size, there was a significant double-digit improvement. Revenues increased by 19% year-on-year with support from all divisions reflecting successful execution of the order backlog and a double-digit growth rate in Services.

Component shortages have been manageable so far for PA, but may intensify a bit near-term, whereby adding uncertainty to timing of converting orders to revenues. It was excellent to see the margin recovery in Process Automation as the operational EBITA margin improved from 6.8% to 13.7% with approximately 270 basis points of this improvement coming from the absence of last year's project charges. The profitability improvement was driven by higher volumes and benefits from earlier taking cost measures. However, slightly offset by mix due to a higher share of systems business. All PA divisions are making good progress and had over 11% operational EBITA margins during the quarter.

As part of the process to exit the Turbocharging business, Daniel Bischofberger has been appointed as new divisional President as of 1st of March. We aim to make the final decision on the way forward towards the end of the first quarter, although a spinoff at the moment looks like the most likely option. In Q1, we expect comparable revenue growth to be lower than what we saw in Q4. This will most likely also weigh on the sequential margin development.

On Slide 10, we turn to Robotics & Discrete Automation, which had another quarter with high order intake, resulting in a year-on-year growth of 59%. Strength was broad-based across customer segments with continued stellar growth in general industry, which should support profitability going forward as the backlog is executed. For the full year of 2021, order intake in the general industry segment has been almost as high as the combined orders of the auto OEMs and auto Tier 1 segments.

Another good example of how we are expanding in new attractive robotics areas is our strategic partnership with the start-up $0.07 that we entered into in Q4. This will enhance our new autonomous mobile robotics offering with artificial intelligence and 3D vision mapping technology, a very exciting field going forward. Despite the strong order intake, revenues remained broadly stable year-on-year as component shortages slowed the pace of customer deliveries in both divisions. The supply constraints in RA are primarily relating to semiconductor shortages and you can clearly see the impact on our ability to convert orders into revenues when looking at the left and the middle on this slide.

Orders have outpaced revenues over the last three quarters, resulting in a record high order backlog of $1.9 billion at the end of the year. We remain confident about the quality of our order backlog and revenue growth will improve once the supply chain imbalances ease. RA's operational EBITA margin increased by 80 basis points year-on-year to 8.1% despite the lack of revenue growth. While the business area faced adverse impacts from increased freight and input costs, this was more than offset by the positive impact from improved efficiency as well as favorable mix due to a lower share of automotive system sales compared with last year. Looking into Q1, we expect comparable revenue decline to be similar to what we saw in Q4, but we anticipate a slight sequential margin improvement.

Moving on to Slide 11, showing the group revenues and operational EBITA bridge. As you can see, the comparable earnings, earnings improvement benefited from our positive organic development as well as the absence of last year's charge related to the Kusile project. The operational improvement was driven by the positive impact from higher volumes, positive price development and increased efficiencies, which more than offset the adverse effects from cost inflation. The reduction of losses incurred in non-core business help margin by 30 basis points, while acquisitions and divestments were slightly diluting on a group level, mainly due to the negative impact from the Dodge divestment.

Let's look at the cash flow on Slide 12. I know Bjorn highlighted it earlier, but I want to also mention that I am really, really pleased about the overall cash delivery for the year as we achieved cash flow from operating activities of $3.3 billion, which is up 78% from the prior year. Volatility between quarters declined, a result of high focus on net working capital management and it was great to see that even with 8% revenue growth, free cash flow conversion to net income was 108%.

Looking at Q4 in isolation, cash flow from operating activities amounted to $1 billion, supported by improved operational performance but with a bit less contribution from reduction in trade working capital compared to last year. In Q4, cash flow also reflects approximately $300 million of cash paid for income taxes related to the Dodge transaction, while we had approximately a $200 million impact due to the Kusile settlement and pension plan transfers in the same quarter last year. Again, overall, a good year for cash flow from operating activities in continuing operations, and I expect a continued good performance broadly at a similar level also in 2022.

Let's finish off by taking a look at our return on capital employed where we also showed strong progress in 2021. As you see on Slide 13, ROCE improved to 14.9% just shy of our target of 15% to 20%. The improvement was driven by both the higher operational EBITA in combination with lower adjusted group effective tax rate. In fact, if you already now would exclude the negative impact on our capital employed related to our 19.9% ownership in Hitachi Energy, we would already be comfortably in our target range. The Hitachi impact is only transitiontory in nature and will reverse after a sale of this investment. Clearly improved return on capital employed is a good indicator that we are really improving ABB's long-term performance.

And with that, let me hand back to Bjorn for some finishing slides.

Bjorn Rosengren

Thank you, Timo.

On the next slide, we take a quick look at the expectations for Q1. We expect the current high level of underlying market activity to remain sequentially stable. That said there is some added near-term uncertainty in relation to revenues due to the supply chain disruptions, which we expect to persist near-term. In this environment, we expect the margin to remain broadly stable or slightly improved quarter-on-quarter.

Now let's finish this session by summarizing our focus areas for 2022. From what we see at this early stage, we expect a positive market momentum in 2022, and so far, we have seen a solid start of the year. To support our long-term growth targets, it is time to ramp up the pace when it comes to acquisition. In line with ambitions, I was pleased to see the E-mobility business increased their ownership in InCharge Energy to strengthen their position on the U.S. EV charging market. As I said before, our ambition is to make at least five acquisitions per year. We will continue to drive the performance culture in all our businesses.

This year, I expect a steady margin improvement towards the 2023 target of at least 15%. As we achieve this, we will continue our journey to deliver even more profitable growth. We will continue our ongoing alignment on the business portfolio. In addition, we have the Turbocharging business. Although we have not yet made the final decision, a spin-off is looking likely. We will make a final decision by the end of Q1. We aim to have the – both the E-mobility and the Turbocharging processes completed during the first half of this year. It will be an exciting year and I look forward to it with confidence.

And with that, I'll let Ann-Sofie take over to guide us through the Q&A. Ann-Sofie?

Question-and-Answer Session

A - Ann-Sofie Nordh

Yes. Thank you, Bjorn. So, let's now open for Q&A. [Operator Instructions] And I can see that we already now have a lot of questions coming through. So – and as usual please limit yourselves to two questions and then we'll do our best to, to do get through as many of the questions as possible.

And we start with a question from the conference call and I believe we should have Ben Uglow from Morgan Stanley on the line. Ben, are you with us?

Ben Uglow

I am. Good morning, everyone and thank you very much for taking the question. I hope everyone is well. So two kind of areas. One is just the – let's call it the operating leverage within Electrification and Motion. And in terms of the margin change and I don't want to get too granular on bridges, but we're sort of down about 80 basis points on higher revenues in Electrification and on Motion 20 basis points underlying on higher revenues. In terms of what's driving that effect and I realize this is very, very difficult. But Timo, can you quantify how much of this is simply price cost, right? How much of this is due to raw materials and not being able to get the price up fast enough? And how much of it could be due to other factors whether its supply chain, wages or kind of more normal costs coming back. Is this sort of over 50% price cost? So can you sort of just give us an idea of what are the main drivers in that margin bridge?

Bjorn Rosengren

Thank you, Ben, for the question.

I think I just start, and then I will maybe go to the, some number crunching just in a minute. First, I'd say that pricing, this is really one of my favorite subject and both of these business areas, Motion as well as Electrification are really doing an amazing job on this side. Just to give you a little bit first on the – because it's a little bit a different topic when it comes to these two business areas. But starting up with the Motion, I think Motion has done an excellent job in compensating some of those. Of course, we know increases that has come everything from wages to component prices and also semiconductors, of course.

So the biggest difference here in the margin actually comes from divestment of the Dodge that has an impact. And there is a little bit also, as you know, when it comes to Motion, they have two different areas. It's the electric motors, and it is the drives business. Electric motors are as a lower margin. So it's a little bit of a mix issue there. So the electric motors grew a little bit more than the drives business did at this moment, which has some effect. So I think they managed from pricing actually to compensate the increases in inflation.

On Electrification, it's a little bit a different story because as you know, Electrification actually consists of two businesses. You have the fast-moving business like Smart Power, Smart Building Installation Product all of them have done an excellent job to quick compensate for the prices. Then we have the distribution solution, which is more the big project switch gear. And many of these orders were actually taken over a year ago and have been executed during the year.

And many of them is both for utilities as maybe for a lot of process industries and the largest industries. And here, the pricing is of course, set at an early stage. And during the year, we've seen quite a dramatic increase in component, logistic and all of this and that has affected the margin here. I think now when we are more used to this inflation by the economy of the part, I think also the distribution solution are now being more active in adjusting the pricing in line with the other businesses. So it's a little bit of a mixed story.

If you go to the number crunching, maybe you can give a little bit more flavor.

Timo Ihamuotila

Sure. Happy too. Thanks Ben, for the question. So maybe easiest is to look at it sequentially because of course the inflationary pressure has been coming in sequentially, so we actually had better pricing than Q3. So if you put it to numbers, we got over $200 million on price and that well covered the cost from input cost in commodities and raw materials and that kind of stuff. But then we had additional costs coming from, for example, logistics and these kind of things in gross margin and that was maybe in the area of $30 million.

And then we actually every year have a bit higher fixed cost in Q4, which we also had now as well, there was in Electrification for example, bit more sales cost. I mean, we have a really good year on top line and that kind of stuff, so that I would put in the situation of normal. So I don't think there is any, any particular drama here. I think we have been able to do a rising well, and as Bjorn said we have some businesses where it comes in with a bit of a lag, but we looked that we will have a good ability to price in going into 2022 as well.

Ben Uglow

Understood, that's really helpful color. Thank you. And then one quick follow-up. Timo, just on working capital. In terms of the moving parts, was there anything that stood out, it's always variable in the fourth quarter but in your mind, was there anything that stood out that was significant in that movement this time?

Timo Ihamuotila

Yes. Thanks for pointing that out. So this is of course, not exactly a normal quarter. I mean, first of all, I want to say that we did a really, really good job in working capital overall. Our working capital to revenue ratio was 8.1%. So I haven't seen it that low. And then if you look at the components, we actually got about $100 million in receivables and our over dues are lowest ever pretty much, so really, really good performance on the team on managing that. We got also about $200 million on payables. But then when you look at inventory, and this is now delta compared to last year because last year, our inventory really decreased significantly at the end of the quarter, we didn't have a similar impact and the delta impact on inventory is about 500. But again, as we have discussed, we have a solid backlog and we expect that that inventory will be will be consumed when we execute the backlog.

Ben Uglow

Understood. Very helpful. Thank you very much. I will pass it on. Have a good day.

Bjorn Rosengren

Thanks.

Ann-Sofie Nordh

Thanks, Ben. And on the topic of backlog, we have a couple of questions coming through from Daniela at Goldman Sachs through the online tool. And I start with one aimed at perhaps you Timo. And it says; how much of the order backlog do you expect delivered in 2022 and also your expectations for organic revenues in this year?

Timo Ihamuotila

Yes. So let's start with the backlog. Actually, this is in our report, it's little bit hidden there, but we would expect to deliver provided we get the supply, of course, 75% of the backlog during 2022. So that's basically the number. But of course, long cycle, short cycle will depend this year a little bit on the supply situation, which is maybe a good bridge to the revenue number answer.

Do you want to jump in there, Bjorn or you want me to...

Bjorn Rosengren

No. I can say on the revenue side, it is, of course dependent on what we can see, maybe some small challenges in the beginning of the year, but it should ease up. So what we do expect, of course for the year to be somewhat higher than our over cycle target during this year, of course. So we need to execute on a huge orders on hand, and that will be the focus during this year.

Timo Ihamuotila

Yes. Yes. So I would just complement that answer by saying that if we get the supply both for the short cycle and executing the backlog, it could be a good revenue year.

Ann-Sofie Nordh

And to follow-up from Daniela here on this topic. On the order book, sorry, on the order intake, how much of the recent strong orders could potentially be due to double booking?

Bjorn, do you want to?

Bjorn Rosengren

I can mention that, of course, when your deliveries are a little bit down and you're not actually delivering in line with expectations in the market, which has been during the last quarter and maybe also during third quarter, there might be some booking. I'm sure there are customers who are putting in order to secure deliveries for the future, so that I'm sure. But I think the good – most important is that we see a steady strong orders actually in all our three regions, and we see this order continue actually in the beginning of this year. And we haven't seen any actually cancellation of any bookings, which gives us confidence that the quality of the orders are also good.

Ann-Sofie Nordh

Very good. And just to finish off here, a question on the EV, the E-Mobility business. Daniela says, we have seen strong decreases on the multiples in the market has been willing to pay for EV charging businesses in recent weeks. If this persists, would you consider delaying the EV listing? Or is the time line fully firmed up?

Bjorn Rosengren

I mean, that could, of course, happen if the world goes kaput. But as it looks like today we feel very comfortable about the agenda that we have today. The business is doing great. I think we had last year, 150% growth which if you're looking at the last five years, it's actually a CAGR of 60%. I don't think you see many businesses like that. I think it's even making profit, and it's a great business. And I think our advisers saying that their viewpoint is that it will be a great interest for this. I also urge you, if you haven't booked up next week, you can actually find a link on our website. We will have in-depth going through that business with the management and talk about the strategy and the future for that. I think it will be interesting, and I hope you have a chance to look in.

Ann-Sofie Nordh

Very good. And we take another question from the conference call from Alex at Bank of America Merrill Lynch. Alex, your line should be open.

Alex Virgo

Yes. Hopefully it is. Good morning to you all. Nice to see you and hopefully that can be physically again soon. Thanks for taking the question. So a couple, if I may. The first, I wondered if, Timo, you might provide us with some quantification as to what you feel you've missed in revenue terms in Q4 as a function of supply chain constraints. And assuming that that will be a similar sort of magnitude in Q1 by the comments that you've made so far?

And then a follow-up was just on the comments you made there at the end about ROCE and the Hitachi investment. Am I right in thinking about a three-year lockup and so presumably, that's sometime middle of next year? If you could just clarify that, that would be very helpful. Thank you.

Timo Ihamuotila

Yes. I'll start with the latter because you are correct. The put option works in a way that we have a put after three years. So it's mid 2023 when we can execute the put and that's how that works, so yes, that's correct.

So then on the revenue, maybe I'll use an example from Robotics & Discrete Automation where the impact is the largest. So you saw we had kind of like 60% order growth and flat revenue, and orders in that business have been now on $1.1 billion type of area and the revenue has been sort of $800 million type of area. And not all of that, of course, could have come into the quarter, but that business could easily be closer to $1 billion type of a business in a quarter. And that, of course, would have a significant accretion on the margin. That's the biggest and then sort of you can assess between the orders and revenue on some of the other businesses. I think the impact has been probably the smallest in PA and then somewhere in between in Motion and Electrification.

Bjorn Rosengren

Maybe I'll just comment also that the order book is up 21% compared to last year, which is, of course, [indiscernible]. And you have seen a book-to-bill ratio above one in the last four quarters. So you can imagine if we could deliver everything.

Ann-Sofie Nordh

Very good. Are you finished there, Alex? Or do you have other questions? Just to...

Alex Virgo

I'm sorry. Yes, I'll stop with my two. Thank you very much.

Ann-Sofie Nordh

Thank you for that. I appreciate it. And with that, we move to Andreas Willi. I think – I hope your line is open.

Andreas Willi

Yes. Thank you, Ann-Sofie. Good morning everybody. My first question is on the supply chain. What is your view on the reasons why ABB seems to be more impacted than most peers on a like-for-like basis in terms of the constraints you're facing? And what changes can you do or are you doing to improve the resilience going forward? Also, if you haven't quite seen results from your peers yet, but in Q3 that was already visible to some degree? That's my first question.

Bjorn Rosengren

Yes. Maybe I can take that on. So maybe you know more than we know. But I think if you look at the ABB product, it has a lot of semiconductors included both in the Electrification business in the Robotic, Discrete Automation and also in the Motion product. I think we have a similar problems as everyone else. We're trying to get our share. All our businesses are working hard. When it comes to semiconductors because I think that's the overall, the biggest impact for us. I think we – it's clear we've gone together. We have our team where we're coordinating all our activities with the suppliers. We are redesigning products to get other type of more available semiconductors in. And I think they've done quite a good job.

Maybe you remember when we went into the quarter, we said we would have a 4% growth, and we managed to get 8%, and I think that's a full credit to the businesses that they really got themselves through this in year. So 8% is actually better than we expected. These will continue, at least in the beginning of the year, and then we will see it slowly go away, and we are pretty optimistic about the second half of the year when it comes to supply.

Last quarter there was not only semiconductors as was material, plastics, steel and all these and shipments, the whole logistics chain was difficult. So there are many factors. Many of these have been solved, and we have seen an improvement actually during the quarter. So October was the worst actually a month and then we saw improvement in November and improvement in December. And I think that's been very good. So today, it's very much focused on semiconductors. The other things, I think the businesses have managed well during the period.

Andreas Willi

Thank you. And my follow-up is on China construction. I think you mentioned some weakness there. Could you maybe elaborate on this? What are you seeing in the market, residential versus non-residential and the outlook there for 2022?

Bjorn Rosengren

Yes. If we look at China overall, we saw a 14% growth, and we should know that it's a very high comparable overall. So I think that that is a strong achievement. And it's clear that it's a residential part, which has taken the softest during the period, and you've seen stronger on the industrial side. That will probably continue going into this year. But we should also know that the levels in China are at a very high level at the moment. Then we have the whole COVID situation where China has a zero vision, as we all know, which means that any kind of breakout they are very aggressive in closing down factories and cities. So there might be disruptions on that side, maybe a little bit too early. We haven't seen it yet. We've been able to run our operations, and I think we have good development in China but this is, of course, a potential risk for any company who has a big business in China.

Andreas Willi

Thank you very much.

Bjorn Rosengren

Thank you.

Ann-Sofie Nordh

Okay. Thanks, Andreas. Just to follow-up on the expectations and comment – earlier comment on the revenue growth for 2022 here. Timo, I believe it was you who answered it. When you say 2022 above through-cycle target, do you refer to the 5% or – was it you? Sorry or just the...

Timo Ihamuotila

I think we would have the same answer.

Bjorn Rosengren

I mean, Timo, you can go ahead. That's fine.

Timo Ihamuotila

No, it's – I think we are referring to above the 3% to 5% of organic growth because we're really talking about organic growth here on that answer. So, yes.

Bjorn Rosengren

And I mean it will be a lot of focus on executing order book also to get access growth going forward. So…

Ann-Sofie Nordh

Very good. We'll take the next question from the conference call. And Joe, are you on the line?

Andreas Willi

Hi, everyone. Can you hear me?

Ann-Sofie Nordh

Yes, we can. Hi, Joe.

Andreas Willi

So would you expect to – I know you expect to clear some of the backlog over the year, but would you expect book-to-bill to remain over 1 throughout the year?

Bjorn Rosengren

I mean that's a difficult question. To be honest, I think we have discussed the orders expectations also with the Board going forward. I think this is probably one of the most difficult areas today to see where things are going. I mean, we've seen a very strong start of this year. Is that going to continue during the year or is – or will it weaken often? So I think it's – I wouldn't actually speculate in this. We will be able to handle both of these. The good stuff is that when you have a lot of orders on hand, you get a little bit more time to adjust your – yourself if things will be softer. But now we go full speed in all our operations, and it's about delivery, and we have plenty to deliver going forward.

Andreas Willi

Okay, fair enough. I know that's a tough one to answer.

Bjorn Rosengren

Difficult.

Andreas Willi

In terms of deployment, you mentioned you'd like to do five deals a year. You're obviously sitting in a position with like a severely underlevered balance sheet once you get the cash in, particularly after turbo and when you look at all this, but if you would – when do you have to evaluate like a significantly higher buyback activity or at what point in the year do you have to kind of make a determination on something like that when it's appropriate?

Bjorn Rosengren

Yes. I mean I can – Timo can talk a little bit about our cash position and what we're expecting to do during the year and maybe I can add something later.

Timo Ihamuotila

Yes, sure. So yes, thanks for the question. So if you look at our overall capital allocation principles, we are actually quite pleased where we are. So we have a really strong backlog as we have discussed. We are investing behind the organic growth. I mean the Board is proposing an increase in the dividend. And then as discussed, we are looking to execute five or so deals in M&A. So we are putting capital in use there as well.

Of course, we want to do smart deals. I mean, it's not like the tap is often we do whatever. We will continue exactly the same rigor on assessing the deals. And then we also said in our release that we expect to continue the buybacks during 2022 also in excess of the Power Grids capital return. Now the Board will then make an assessment on this one going into the AGM, but we, of course, with this wanted to see now that we are looking to continue the buyback program also after the Power Grids money has been fully returned to shareholders.

Andreas Willi

Perfect, thank you.

Ann-Sofie Nordh

Thanks, Joe. And we move on. Martin Wilkie [Citi], I think and hope your line is open. Can you hear us?

Martin Wilkie

Yes, I can. Thank you. Good morning. It's Martin from Citi. Just – the first question just coming back to some of the constraints in shortage. I think you referred to you can redesign or change components and so forth in products, presumably also some of your component suppliers are adding capacity. Can you give us any sort of examples as to when some of these shortages and bottleneck might clear because of some of your own actions or actually by our suppliers? I guess we're all hoping that the world generally opened up in the second half. But I'm guessing some specific things that you have done immediately over the next couple of quarters.

Bjorn Rosengren

Yes. I think, first, we buy a huge amount of semiconductors into ABB. And in certain application, I think that we've been very successful in the drives business to do some of that redesign, but also in other kind of businesses. But it varies a lot depending on how big the series are, how much you are selling of the product. When you go into more the – if you put into the switch gear, which is more related to large projects, there are more fewer numbers of certain semiconductors going in and some of them in process industries have been evaluated during two, three period to get acceptance.

So there it's a little bit more difficult. So it varies a lot. But I don't think this is any bigger issue for us than anyone else. We've been dealing with it now for three months, for a quarter or even longer than that, and we will continue to deal with it. And I feel that we're slowly moving in the right direction. And as I said, as time goes on, we will be less dependent. And I think our deliveries, of course, our revenues will be depending on, especially in the beginning of the year, how much of this order book we can get out. So…

Bjorn Rosengren

Yes, that's helpful. Thank you very much.

Bjorn Rosengren

Thanks.

Ann-Sofie Nordh

Thanks, Martin. We'll take another question from the online option here from Gael De Bray at Deutsche Bank. Can we add some flavor on what we see in the oil and gas market and in the different areas there?

Bjorn Rosengren

Yes. I mean maybe you have seen that the Process Industries has had a good development during the quarter, and we see good both when it comes to actually the revenues but also orders. Maybe the order doesn't look that impressive, but we are – had huge orders in the Q4 the year before in the LNG market. So that comparables are quite good. But we see increased activities in all the businesses that we have there, also in the oil and gas business, especially related to gas and chemicals, I would say. So we're quite optimistic that we've seen the development of the oil price.

Oil and gas prices has gone up dramatically, which, of course, increases the appetite for investments in that region. Service business, which is – if you look at PA process automation there is 50% or approximately 50% of the revenues there. We've seen very, very strong growth in service there. I think it was up 21%. So very strong service improvement, which is good also supports the margin forward. So it gives a little bit of an indication of what are the activities in this sector.

Ann-Sofie Nordh

Very good. And then we take the next question coming from the conference call. And we have Phil Buller from Berenberg. Can you hear us?

Phil Buller

Yes, thank you.

Ann-Sofie Nordh

Very good.

Phil Buller

Yes, of course, I can hear you, yes. I was hoping just to probe a little more on the growth outlook in 2022, please. Obviously, we don't have a specific guide. I hear the comments of above 3% to 5%, which suggests that enter maybe a shade too high. But I was wondering if you could comment on how much of the growth you are expecting in 2022 is actually going to be coming from price as opposed to volume. Is it all price? Or is there a good level of volume? And obviously, I'm asking because volume helps from a fixed cost absorption standpoint and more than that passing on price. And I have a second question as well.

Bjorn Rosengren

Yes, I can start with that. I mean it's quite clear that we expect to have a good growth in revenues during this year. I think you can imagine that. We see a strong market, but we also big orders on hand, and we're going to execute that. So what we are saying that, of course, we do expect that we will exceed this over a cycle targets that we presented during the Capital Market Day. I can only say that. And I said, how much more is probably related to some of the supplies and our possibility to execute this huge order book that we have.

Phil Buller

Sure, sure. And I was more curious as to how much volume is going to be coming through within number this year rather the overall if you can comment on that that's fine. And my second question…

Bjorn Rosengren

That's fine.

Phil Buller

And my second question is on a slightly different topic in relation to the E-mobility business and perhaps is programming, what's going to be on the website, I think next week. But you have this very nice Investor Day on the topic of transport at the second half of last year and the importance of it for the whole ABB. And obviously, E-mobility is a big part of that puzzle, but it's something that you're spinning out, which makes a lot of sense from a multiple standpoint. But I was wondering if you could comment on any of the – E-mobility being separately run and listed and what you're putting in place to ensure that the wider ABB will still benefit from all those synergies that may otherwise not be there.

Bjorn Rosengren

Yes. First, I think, it's very important that the IPO that we are doing is only a part of that we say at least 20%. So the whole E-mobility development will be consolidated into ABB. We will, of course, also use the brand ABB because it's a good way to – because it's very exposed to all around the world outside. So we think it's good. And I think ABB is well known for electrification, so it fits very well. So I think the reason why we do it is that, as you've seen, our orders grew last year 150% and we have the CAGR the last five years about 60, which means it's a little bit of different kind of business than rest of ABB, which means that we believe that the demand in the market need to be met, and it's run a little bit more like a start-up business than it is – than a mature business like rest of ABB.

So what we're doing, we have a new board in place. We have a new Chairman, which is actually coming from this kind of tech industry. We will have a special board and they will drive very strong focus as you have to do of any company that are starting up. What's unique with our business is that even though we are the biggest and growing among the fastest in the market, we are still profitable, which makes the business even more interesting in these times now for the IPO.

Timo Ihamuotila

Yes. Can I make a quick comment on the synergies as well? So you mentioned the brand, but we are also very carefully considering kind of like the independence of the company. Of course, they need to be able to invest behind their own business, but we are also offering them a platform in a smaller country sales, they can use EL sales as a channel. So big countries, own channels, smaller countries up to them. And of course, this happens on sort of arm's length pricing and all that, but that's another area where we're really enabling them to grow fast at the same time. So hopefully, we really get the best of both worlds on the independence – but independence, but also getting the synergies.

Phil Buller

Great, thank you.

Bjorn Rosengren

Thanks, Phil.

Ann-Sofie Nordh

Thanks, Phil. And we'll take another question from the conference call, Guillermo from UBS, please?

Guillermo Peigneux-Lojo

Good morning. Good morning Ann-Sofie. Good morning Bjorn and Timo. Thanks for taking my questions.

Ann-Sofie Nordh

Good morning.

Bjorn Rosengren

Good morning.

Guillermo Peigneux-Lojo

Your plan is – it goes basically two questions. One is on electrification and the other one is on robotics and discrete automation. The first question is on electrification, your plant in Xiamen in the Fujian Province. I think it was impacted in the third quarter by lockdowns relative to COVID. And I was wondering whether during the quarter, the fourth quarter, you also had some kind of impacts on that plant in particular? And if so, when do you expect it to be fully operational? And I'll stop there and then ask the second question. Thank you.

Bjorn Rosengren

Yes. I think when it comes – I talked a little bit at the beginning of that electrification. Yes, it was challenging going into Q3 in North America and with the labor market, big volumes, component shortage and all that and also on the inflation of commodities and components and so on. But I think they did a great job in actually working with the pricing. They are within ABB, probably the most sophisticated machine when it comes to working with pricing.

There are though two different areas. And I think the more the component business, the smart power and the smart building and installation product, that is moving on quite good and delivering what it should be doing. The challenge is more related to the switchgear, the bigger projects where we have longer lead times into. I think that is now being addressed and we are working with the pricing side there also to compensate some of those huge cost increases that have begun. So we feel pretty comfortable that we should see a good development of electrification going into this year also on margin.

Guillermo Peigneux-Lojo

Okay. But any lockdown impact in Q4 versus Q3 or just fully operational as we see?

Bjorn Rosengren

No, we had – we didn't have any lockdowns. So, I think everything went good during this period.

Guillermo Peigneux-Lojo

Thank you. And the second question is on robotics and discrete automation and I wanted to ask maybe for an update on the new plant in Shanghai. When do you expect it to be fully operational again? And any particular host or revenue dynamics that we should be aware of going into 2022. Thank you.

Bjorn Rosengren

Yes, thank you. It's clear that the robot and discrete automation is the two businesses, who has been mostly impacted of the shortages of semiconductors. You can see that that we are on the revenues not really getting out. You saw order growth of 60% and flat revenues. That's pretty dramatic. And then you, of course, see all the cost inflation there, so that was effect. So that is a strong focus during the year, and we are, of course, expecting a significantly improved both when it comes to volumes deliveries as well as margin. You know very clear that I have said from the beginning this is a business that should be about 15% and we should see a good step in the right direction during this year.

Ann-Sofie Nordh

And I believe, correct me if I'm wrong here, but also I believe you also wanted to know about the new plant?

Guillermo Peigneux-Lojo

Yes.

Bjorn Rosengren

Yes, sorry. Maybe you want to talk about it.

Timo Ihamuotila

I don't have anything new on the time line of opening the plant.

Bjorn Rosengren

I think this year we will actually inaugurate the plant. They have been working very hard during the last year here now, and it's getting ready. And we're really looking forward to this new facility because the growth in China is actually where we are growing fastest today in the world. And – so it's important that we can meet that both with the right quality, technology and the growth capabilities there. So we're excited about it. And hopefully, we will see China open up a little bit more. So also some of us can then to go there.

Timo Ihamuotila

Well, for a long I just – can I just mention something just that there is no misunderstanding. I mentioned this getting closer to the $1 billion quarterly revenue. We have capacity to get there and this is really for longer term. So just to be clear, we have been on fairly low revenue levels. This is not like we need a huge infra to get to those levels where we can execute a really nice margin in Robotics and Discrete and then we can build on from there.

Bjorn Rosengren

I mean the whole production is built on assembly. So I think you need to have the components and you put them together. So if we have the component, we can also deliver.

Guillermo Peigneux-Lojo

Thank you. But maybe – if I may actually follow up a little bit on the plans, I was also looking for any from loading of cost, maybe on the opening on the ramp-up of production if you have any guidance at this point or whether we're going to see any operating leverage hit on the back of basically a new plant opening before you get actually to that ramp-up…

Bjorn Rosengren

No, I think that we should not have any effects on the cost structure.

Timo Ihamuotila

Not a major driver.

Bjorn Rosengren

No, not really, I think. I think it's important to see that the gross margin of all our businesses have improved very good during this year, which shows that we're keeping the cost under control and we managed to actually to price and have a good margin on most of our businesses.

Guillermo Peigneux-Lojo

Thank you.

Ann-Sofie Nordh

Thank you. And we are up to the hour. So, we say thank you very much for joining us today. And again, just a quick reminder, as Bjorn mentioned before, if you have the time to tune into the E-Mobility session on the afternoon of the 10. Thank you.

Bjorn Rosengren

Thank you.

Timo Ihamuotila

Thank you.