ABB, Ltd. (OTCPK:ABBNY) Q1 2024 Earnings Conference Call April 18, 2024 4:00 AM ET

Company Participants

Ann-Sofie Nordh - Head of IR
Bjorn Rosengren - CEO
Timo Ihamuotila - CFO

Conference Call Participants

Daniela Costa - Goldman Sachs
Hemal Bhundia - UBS
Will Mackie - Kepler
Alex Virgo - Bank of America
Sean McLoughlin - HSBC
Martin Wilkie - Citi
Gael de-Bray - Deutsche Bank
Sebastian Kuenne - RBC Capital Markets
Delphine Brault - ODDO
Jonathan Mounsey - BNP Paribhas
Alasdair Leslie - Bernstein
Andy Wilson - JPMorgan

Ann-Sofie Nordh

Greetings to you all, as I welcome you to this presentation where we will talk through ABB's Results for the First Quarter. I'm Ann-Sofie Nordh, Head of Investor Relations. And next to me here is our CEO, Bjorn Rosengren; and CFO, Timo Ihamuotila. They will take you through the presentation before we open up for questions.

But before we begin, I should mention the information regarding Safe Harbor notices on our use of non-GAAP measures on Slide 2 of the presentation. This call includes forward-looking statements based on the company's current expectations and assumptions, which are subject to risks and uncertainties.

And with that said, I will kick off the presentation, and I hand over to you, Bjorn.

Bjorn Rosengren

Thank you, Ann-Sofie, and a warm welcome from me as well. Let's summarize the quarter on Page 3. The year got off to a good start with orders at $9 billion. This is one of the strongest quarters for ABB. Both Electrification and Motion were at new record heights. Orders in Process Automation declined, but remember that the comparables was on an all-time high level of $2.1 billion. And importantly, the underlying markets remain consistent with recent quarters.

In Robotics and Discrete Automation, you recognize the pattern of sharp order decline. In Machine Automation, you can still see the pre-buys effect. And the robotic market declined from last year. But we saw encouraging sequential signs. I will talk more about this on the next slide.

To summarize, we see a continued high level of customer activity in their project and systems areas. And it is encouraging to see the positive order development in Electrification's short-cycle business. I feel even more confident about 2024 than I did coming into the year. It was good to see the record level operational EBITDA margin of 17.9%. This was supported by Electrification and Process Automation, which both delivered new highs. This is a good sign that there is still upside potential in ABB.

Also, cash flow was strong at $550 million, a great start to what should be another strong year for cash. We expect free cash flow to be at least similar to last year. Timo will talk more about that later on.

We published our sustainability report, which included the proof point of our core customer value proposition. We helped our customers to avoid 74 megatons of greenhouse gas emissions from the products we sold in 2023. At the current total of 139 megatons, we are on a good path towards our ambition of 600 megatons avoided emissions by 2030. In short, we had a good start to the year, even stronger than expected for orders and margins.

We also announced my decision to retire as CEO. In August, I will have been with ABB for close to five years. The transition towards the ABB Way operating model went even faster than expected. And today, ABB is in a good shape.

I think this is a good time for me to hand over to Morten. He has been with ABB for 25 years. He knows the company and its customers well. And importantly, he has a proven leadership track record and a strong belief in the ABB Way operating model. I feel confident that ABB will be in good hands.

Now let's talk about the market development on Page 4. Comparable orders declined by 4%, down from last year's record high comparable. And as I mentioned earlier, orders actually came in a bit stronger than expected. I did not foresee both Electrification and Motion to improve to all-time highs, a very strong achievement.

In the project and system business, we continue to see high activity. But now we also see encouraging signs in the short-cycle areas, which only declined by low single digits. And in Electrification, it even contributed strongly to order growth.

We called out early that Q4 would be the low point for the absolute orders in RA. And we now saw a good sequential order increase. In Machine Automation, we still see pre-buy effects and the order backlog supports deliveries until late summer. This is when we will get a better belief for where the real market is. The robotics market was down in all regions from last year, but the sequential pattern was encouraging.

We see a continued strong momentum in segments like utilities and datacenters, but also in marine and ports. Even the buildings segment supported orders driven by the U.S. commercial segment in electrification. Comparable revenues increased by 2%, equally supported by price and volumes. We had support from the strong order backlog, which continued to grow to $22 billion. And this makes us feel confident for the year. Book-to-bill was positive at 1.14.

Now let's turn to Slide 5 and look at the geographical developments. The U.S. remains the most robust market, but the American region declined slightly due to timing of large orders. EMEA remained stable. And we see very strong development, for example, in India. China declined year-over-year with soft activity in several segments. But the message internally is that we see a stable sequential pattern in China and with a slight positive undertone for the future. Europe dropped by 9% with the biggest decline recorded in areas of Robotics and Discrete Automation.

Now let's turn to Slide 6 and our earnings outcome. In the chart, you see the strong improvement in both earnings and margin. Operational EBITA was up 11% and the margin increased by 160 basis points to 17.9%, a new record level. We had positive impact from price, operation leverage on volumes and continuous efficiency measures. This more than offset higher spend in, for example, R&D.

In the quarter, we also had about 20 basis points support from corporate costs being slightly lower than expected due to some timing impacts. It was good to see the gross margin increase by 270 basis points to 37.3%. All in all, it was a good achievement by the teams.

With that, I hand over to Timo.

Timo Ihamuotila

Thank you, Bjorn, and greetings to everyone from my side as well. Let's now flip to Slide 7, and Electrification. I have to say that it was really good to see them deliver new record level orders. The market environment in the project and system businesses remained good. And this was now coupled with a mid-single-digit growth in short-cycle orders. This combo resulted in the strong comparable order growth of 8% year-on-year. We saw stability or improvements across most segments with outstanding growth in the areas of datacenters and utilities.

As Bjorn mentioned, the Building segment improved after several quarters of decline. This was driven by a good demand in commercial buildings in the United States, which offset the general weakness in the building segment in China. Europe continues to show signs of stabilization at a lower level.

Turning now to revenues. The Electrification team again executed well and delivered 6% comparable growth. Price was slightly positive, but the key driver was higher volumes supported by backlog deliveries and this time with the added support from the book-and-bill business. Operational impacts from higher volume and pricing, coupled with continuous improvement measures, offset some of the cost inflation and resulted in a new record high margin of 22.4%. All in all, a very strong quarter for electrification, adding to our confidence for the year.

Looking ahead into the second quarter, we currently expect the growth rate in the comparable revenues to be higher than what we saw in Q1 and the operational EBITA margin to be slightly up sequentially.

Let's move to Slide 8 and the Motion business area. They also delivered a new record level of our orders at $2.3 billion, up 1 percentage point on a comparable basis. This was supported by the project and systems businesses. And the Traction division was the engine for order growth, including the $150 million ticket in Australia. But we also saw encouraging signs for the short cycle business through the quarter.

Apart the good momentum in rail, there were favorable moves also in oil and gas and power generation, including investments in grid stabilization equipment. Some slowness from last year's high level was noted in areas like pulp and paper, chemicals and HVAC.

Looking at revenues, we recorded a comparable decline of 6%, as contribution from backlog in our traction and large motor businesses was impacted by some delivery timing changes and did not fully compensate the weaker short-cycle business. The price impact was slightly positive, while volumes declined overall.

Motion's operational EBITA margin came in at 18.5%, decreasing by 40 basis points hampered by operating leverage on lower volumes. That said, the team did a good job in offsetting some higher expenses related to salaries, R&D and SG&A with price increases.

Looking ahead into the second quarter, we anticipate a low comparable growth in comparable revenues year-on-year and operational EBITA margin to be slightly up sequentially.

Then turning to Slide 9 and Process Automation. And looking at the chart on the left, we can see orders down 20% on a comparable basis. Note though, that this is down from last year's record level of over $2 billion. The decrease is mainly due to the combination of last year's quarter being supported by a very high share of large orders.

And this year, we instead had some timing pushouts. In my view, the order level of $1.7 billion is a good indication that the underlying market remains buoyant and that PA continues to focus on quality of revenues. This is the right strategy for PA, particularly when looking at the project pipeline, which continues to be strong. But total orders declined, down in the large process-related segments of oil and gas, pulp and paper, and mining.

However, a positive development was recorded in ports as well as in the less sizable low-carbon related areas such as nuclear, carbon capture and hydrogen. Comparable revenues were up by 12%, which was even better than we anticipated with all divisions contributing to growth. Deliveries from the order backlog were the key drivers, but we also had some positive pricing coming through.

I took a quick look at history, and this was actually the 14th straight quarter that Process Automation has had a positive book-to-bill, job really well done. At 15.6%, also Process Automation delivered a new record high margin, up by 140 basis points from last year. All divisions contributed on the back of better project execution and delivering from the backlog with improved gross margin. It's really nice to see that all divisions are now in the so-called teens range.

Looking at our expectations for the second quarter, we foresee at least a mid-single-digit growth rate for comparable revenues and the operational EBITA margin to be ballpark similar to the first quarter.

On Slide 10, we then turn to Robotics and Discrete Automation. As mentioned earlier, we delivered on our prediction of sequentially higher orders. But from last year's very high level, comparable orders declined sharply by 30%. In Robotics, demand declined across the board, but the sequential pattern was encouraging, including China. Inventory levels in the channels did seemingly normalize as expected towards the end of the quarter.

In Machine Automation, the order backlog remains high and should support deliveries into the latter part of the summer. Meanwhile, customers hold on placing orders, awaiting deliveries from pre-buys.

Moving to revenues, which decreased by 7% on a comparable basis. This is the combined outcome of Machine Automation recording a strong positive development, as they execute on the backlog and the adverse impacts from the short cycle business still under pressure in Robotics. Leverage on the lower volumes put pressure on the margin year-on-year to 13.2%, which more than offset positive mix and stringent cost efforts. For the second quarter, we expect a mid-single negative growth in comparable revenues with some sequential pressure on the operational EBITA margin, mainly from mix.

Moving on to Slide 11, showing the operational EBITA Bridge. The profile is very similar to recent quarters with earnings improvement driven by strong operational performance. We benefit from the positive price execution at about 1% and leverage on higher volumes. Unlike recent quarters, it is good to see a positive impact from efficiency measures in operations, which more than offset cost inflation linked to labor, SG&A and R&D. All in all, an 11% improvement in operational EBITA with a 160 basis points margin increase, a great outcome.

Now let's move to cash flow on Slide 12. The $551 million of free cash flow was, in my view, an excellent cash generation for a first quarter. Best Q1, at least during my seven years at the company. All business areas had a positive operating cash flow and 3 out of 4 BAs improved from last year. The increase was mainly driven by better operational performance as well as less buildup of net working capital, mainly related to strong collection of receivables and less inventory buildup versus the prior year. This resulted in an increase in free cash flow of $389 million despite higher CapEx investments. This puts us on a good path to deliver another year of strong cash at least similar to last year's $3.7 billion.

And with that, I will hand over to Bjorn to round off this presentation.

Bjorn Rosengren

Thank you, Timo. Let's finish off with outlook comments on Slide 13. We had a stronger than expected start of the year, so we raised our margin ambition for 2024. We now expect the operational EBITA margin to be about 18%. For the second quarter, we anticipate a mid-single-digit comparable revenue growth year-over-year and the operational EBITA margin to be slightly higher than in the first quarter 2024.

Now let's open up for questions.

Question-and-Answer Session

A - Ann-Sofie Nordh

I say, yes, let's do so. [Operator Instructions]. And with that, I say we open up for the first question. And we open the line for Andre at UBS. Are you with us? No, seems not. Let's see if we're more successful with Daniela or if we have a technical issue?

Daniela Costa

Hi, can you hear me? It's Daniela from Goldman here.

Ann-Sofie Nordh

Very good.

Daniela Costa

Perfect. Thank you. So yeah, I guess I'll keep it to one as you asked and my main question is regarding Electrification products, which seems to be the largest part of the surprise versus the market and also of your margin commentary, I guess, from what you've said. Can you give us a little bit more of a mix of what's happening in low voltage versus medium voltage? And how much of these very strong margin you've had and the guidance going forward comes from that mix. This color would be very helpful. Thank you.

Bjorn Rosengren

Good. Thank you. Let me talk a little bit about it. I mean, we said that we see strong development in utilities, but also in datacenters. We can see Smart Power also delivering record margin, which is coming from the low voltage and the low voltage switch gear.

But I also think that U.S. is the strong driver even though the whole market is good. And the improvements from the GIS integration is actually paying off, and we start seeing really good margins also in the North American region, which supports us up. So it's good development, of course, in the medium voltage like the DS business, but also on the low voltage, is developing well.

And good margin also in Thomas & Betts business, which is very much related also to that U.S., is moving from overlying infrastructure in California and in Florida to actually dig the whole infrastructure underground because of fires and tornadoes. And our medium voltage equipment, underground switchgear there is a very strong part of that business.

Daniela Costa

Maybe just double checking in here. On the subdivisions, are there any areas that are still lagging your targets and our big self-help opportunities? Or now it's just more about growth continuing to be good for the margin uptick from here?

Bjorn Rosengren

Of course, stability, profitability and we are very profitable today. So yes, we are pushing growth. And I think you can also see that in this report. But there is still potential in the North American market on the margin side. So I think that could be. But over 22%, I don't think that is what's going to drive the value for this business. It's the growth that is the focus going forward.

Ann-Sofie Nordh

Okay.

Daniela Costa

Thank you.

Ann-Sofie Nordh

Thank you, Daniela. And we'll try Andre again, UBS, not to -- are you with us now?

Hemal Bhundia

Hi, yes. It's Hemal Bhundia on behalf of Andre Kukhnin. I just wanted to ask on the short cycle. Could you provide a bit more color on the short-cycle revenue improvement in Electrification in Q1? And also just on short-cycle, orders appear to be improving in Motion, could you please comment on what is driving this geographically and by customer segment, please?

Bjorn Rosengren

Yeah. I think I give this to Timo.

Timo Ihamuotila

Sure. Thanks, Andre. Yeah, so as we said in Electrification, we had actually a high single digit improvement in short cycle, which is really good to see. And it comes from the same sectors, what Bjorn was discussing, i.e., ELSP datacenters. There is, of course, some short-cycle business going to utilities as well. But we also saw some encouraging signs in smart buildings, which was really, really nice to see. And actually, even in China, we saw some encouraging signs on short cycle. So I think these are the segments and also a little bit of a geographic color. U.S. was clearly strong, but as I said, also a little bit positive signs in China on short cycle.

Ann-Sofie Nordh

Very good. Thank you. And now we'll try Will at Kepler, you with us? Your line should be open.

Will Mackie

Yeah, good morning to everyone. Thanks for the time. My question will focus on China. Can you please throw out some color across where you see stabilization or improvement as we think across either the divisions or the business channels or the end market vertical? And specifically, how that might pan out across the Robotics segment? Thank you.

Bjorn Rosengren

Yeah. Let me start and then maybe Timo can fill in afterwards. But, yeah, it's quite clear that the momentum in China is start moving to more positive. And this is the first time in a year that we feel that in our operations. So maybe it's not seen in the minus 18, but I think the underlying. You saw the Electrification where you have the short-cycle business is just marginally down compared to very, very strong last year.

So I think the whole industry part is the positive and driving part, while the building sector is still soft. But also, the Robotics continue to be the biggest challenge, of course in that. What good is that, on that, we've seen a good growth outside China, which actually compensated the softer? So India is actually sticking out quite a lot. And so if you look at Asia by it all, it actually becomes flat.

But you also heard from China that the GDP for the first quarter was 5.3%. I think that is very much in line with our view and also the PMI was above 50%, which is now somewhat positive in the industry. So we do expect to see more growth in China going forward.

Timo Ihamuotila

Yeah, maybe if I just throw something on the Robotics side. So we saw at this time, I would say, sort of finally, the normalization of the channel. And in that sense, in Robotics going into Q2, it's early days to say this, but I think in Robotics, we will see some order growth in China, Q2 and it's possible. I mean, we, of course, don't hit yet, but it's possible that we would even see a little bit of order growth overall in China Q2. So we are seeing some sort of early signs.

Also actually, EL Smart buildings, slightly positive in China. So there are bits of information, as Bjorn was saying. But maybe it's also worth noting that if I remember correctly, China has been going down maybe seven quarters for us. And China out of our total revenue now is about 14%. It used to be higher. U.S. is actually now about 26%. So there's been a bit of a tilt in that side as well. And we, of course, would like to see growth in China as it's quite profitable business for us as well.

Will Mackie

Thanks a lot.

Ann-Sofie Nordh

Thanks, Will. And we open up the line for Alex at Bank of America, Merrill Lynch.

Alex Virgo

Yeah, thanks. And good morning, Bjorn [Technical Difficulty] Thanks for taking the question. I wondered if you could just dig a little bit into Motion for me. If I take out that rail order, it looks like the orders were down about 6%, 7%. So kind of in line with where they were in Q4. So I'm just wondering what we're seeing in terms of the positives that you're talking about here and how you're thinking about the signs suggesting things are going better because that would seem to suggest the underlying business perhaps still pretty soggy.

And I wondered if you could sort of take that into just developing a little bit around the margin development in Motion and how we think about that for the balance of the year? Thank you.

Bjorn Rosengren

Sure. Yeah, you know we have seen during the years a softening in the short-cycle business and the project business has been the driving force in Motion for quite some time. And in addition, there were some delivery issues from our order book during the quarter, which we believe will be normalizing during the year. So even the revenues were a little bit lower than we anticipated, but we still see many of these orders that will be delivered out during the year.

Our Motion business actually consists of two areas. We have the motor business and you have the drives business. And it's quite clear that during the last 12 months, we've seen large motors and generators as well as the medium voltage switchgear and including an enormously strong development of the service business. So that is a little bit of a shift, what you've seen before. And you know that the most profitable division we have within Motion has -- is the low-voltage drives, which have had a little bit softer development during the year, still, of course, very good, but not in that enormous drive that we had during last year.

So I think it's a little bit of a mix moving towards this project business. But we feel confident that we will be delivering out the right volumes for the full year, but also protect the margin. Is there anything you would like to add?

Timo Ihamuotila

Yeah, maybe just on the margin question. So as we said, we expect going into Q2, sequentially, Motion's margin to be slightly up, but not reach the levels because of the mix reason Bjorn discussed of last year. So I think it was a little over 20% margin last year, so that's for the quarter.

But let's see how it goes for a full year. If we look at overall full year drivers for margin by business area, EL, we clearly expect to be positive, BA may be slightly positive. Motion could be around last year's levels, just ballpark stuff and then RA probably a bit down, something like that.

Bjorn Rosengren

And I also like to mention that because I think when it comes to large motors and generators, which was a crisis business in ABB. And I think they've done remarkable job to improve the performance of that business. And today, it is between 10% and 15%, which I think is a really strong margin level for that. So that is, of course, also helping and supporting our margins.

Alex Virgo

Okay. That's super helpful. Thank you very much. Could I just clarify one final thing, just on your last -- the answer to the last question from Will on China? How much of your sort of positive comments on China is driven by the fact that the macro data has got a little bit better than we thought the PMI GDP you mentioned there? And how much is actually, yes, the conversations you're having with people on the ground towards the back end of the quarter? Because obviously, the order decline, you mentioned, obviously, is 18% in the quarter. It was minus 7% I think in Q4, so it doesn't -- so just to push you a little bit on that.

Bjorn Rosengren

No, I think the macro data that is just confirming our conversation with our businesses. And I'm sure you -- we wouldn't even mention anything of positive if we didn't hear these positive signals from our local operations in China so--

Timo Ihamuotila

Yeah, exactly. I mean we run quite rigorous five-quarter rolling estimation process. This is, of course, done by business and by division, but we get a bit snippets of information on geographic level and that stuff as well.

Bjorn Rosengren

And I think it's also fair to say that this is the first time in the last five quarters that we are seeing any positive signs on the local market.

Alex Virgo

Yeah, great. Thank you very much both.

Ann-Sofie Nordh

Thanks, Alex. And then we'll move to Sean at HSBC.

Sean McLoughlin

Good morning. Thanks for taking my question. Just coming back to the short-cycle trends. You previously flagged resi construction is an area of particular weakness. Maybe you could detail how you're seeing this segment on a sequential basis? And maybe which other short-cycle areas you think have room for further improvement.

Timo Ihamuotila

Yeah, maybe I'll start here. Thanks for the question. So first of all, resi is about 10% of Electrification. Let's remember that it's, of course, a super important market for us in places like Germany, in particular. And there, we actually have seen a little bit of a pickup in the business. But overall, it's not like a huge part of overall Electrification. And where we are seeing the pickup on the short cycle and a lot of that is coming from the Smart Power division, which Bjorn discussed earlier, is in the areas of datacenters, as we discussed, some going to utilities.

And also non-resi construction, which is, if I remember correctly about 20% of EL's business. So it really is quite broad based. And we have a very, very strong product portfolio, especially also competitive wise in Smart Power. So it's really good to see the growth there.

Sean McLoughlin

What other areas do you think are still lagging behind?

Timo Ihamuotila

What was that? Sorry, I did didn't get the question.

Sean McLoughlin

Particular end markets that you think, particularly on a short cycle that are still lagging behind?

Timo Ihamuotila

Outside resi, I don't think there is a huge bunch of outside resi construction, which is sort of lagging behind. I mean, as I said, we had high single digit short cycle growth in Electrification during Q1, which was actually slightly more positive than we expected going into the quarter. And now it would be, of course, great to see a similar trend start happening in Motion as well.

Ann-Sofie Nordh

Okay, very good. Thank you, Sean. And then we move to Martin at Citi. Your line should be open.

Martin Wilkie

Yeah, good morning. Thank you. It’s Martin at Citi. Can I drill down further into North America Electrification? There's a lot of industry commentary on shortages for switchgears and transformers in particular? And just to understand what you're seeing there and what portion of your U.S. business is impacted from any of these shortages. And really just to understand what that means for lead times. We're hearing some comments that certain products are now taking a couple of years to deliver, worsening with pricing, if you apply for capacity additions. Just to get some color around that subset of the business. Thank you.

Bjorn Rosengren

Maybe I'll start and then Timo can add on to it. Yeah, it's correct that building out the infrastructure in the whole electrification that is taking place, the transformer plays an important role. And there is shortages of transformers in the market at the moment, and you have longer delivery times there than many other of the equipment, setting up some of the standard, so that is correct.

But it is not on a level, as you can see, we get quite good revenues still in both the utility sector as well as in the datacenters, which is growing very sharply during this period. So it's not becoming a huge issue. I think it's more or less for the buyers and for the projects are probably putting that time schedule in line with the supplies of transformers.

Do you want to add anything there?

Timo Ihamuotila

Yeah. Maybe just that on the switchgear, which has been the other area where there's been a little bit discussion of this. I mean, transformers is, I would presume in a slightly different level. But nevertheless, we are investing a lot of CapEx in the U.S. and also in Mexico for medium voltage switchgear and also low-voltage products so that we are really serving the growth of that market. So I think as Bjorn said, we should be in a pretty good place there.

Ann-Sofie Nordh

Then we move --

Martin Wilkie

Thank you [indiscernible].

Ann-Sofie Nordh

Thanks, Martin –

Timo Ihamuotila

I think he's trying to ask something else.

Ann-Sofie Nordh

Yeah, I think, you're trying to ask something, but your line is very bad. We unfortunately can't hear you. Do you want to try again?

Martin Wilkie

Is that better?

Ann-Sofie Nordh

Yeah. Slightly, yes. Go ahead.

Martin Wilkie

It was really just to clarify, I think what you're saying is, it's not really going to hugely change the backlog conversion rates. There's obviously been very strong orders, but we shouldn't expect that this feature is going to significantly change the rate at which you convert the backlog in Electrification.

Timo Ihamuotila

No. No, in our case, I think we have taken the delivery times expected into consideration in the backlog conversion data what we have to our best ability, of course. I mean, this is not an exact science. It's fair to say this whole backlog conversion, but we are, of course, trying to understand both internally are giving you a little bit of color on that as well externally on our report.

Martin Wilkie

Thank you.

Ann-Sofie Nordh

Thanks. Then we open up the line for Gael at Deutsche Bank.

Gael de-Bray

Good job. Good morning, everybody. Thanks very much for the time. Bjorn, you mentioned that ABB was in a very good shape, which is obviously the case looking at the performance today. You also mentioned that the transition to the ABB's Way operating model was implemented faster than expected. So look, is there anything left to do? Where do you think that Morten can make a difference or push things up a bit more?

Bjorn Rosengren

Yeah, it sounds like a question for me. Yeah, I definitely think ABB is in great shape, and I think the transition has gone faster than I anticipated starting up here. But I think the whole company is very much aligned today with the ABB operating model and the way we drive performance management, which I think actually reflects in our numbers this quarter, but this is only the beginning of the journey.

The model we have is driving our division's improvement in performance. And it starts with stabilization, it goes to profitability and then growth. And today, majority of our divisions are in so-called growth mode. And even the divisions that were in stability mode is now in a profit improvement mode.

So if you look at ABB overall, it's really gone from improving profitability to drive growth. And I think that is where the biggest value creation is going to happen going forward. And this is both organic as well as inorganic. And we have quite an exciting pipeline of acquisitions, which you will see in the coming months. And I think that is important.

We said 5 to 10 M&A acquisitions per year is where this company should be. And I think we are on these levels today, and I think there is even more potential. And our financial situation actually supports all of these acquisitions, and we'll be happy actually to spend a little bit of money to find the right technology and the right companies to support further growth of the group. But that's pretty clear. That's where the focus is supported by our long-term financial goals from organic 5% to 7% over a business cycle.

And yeah, it is an exciting time at ABB when you look at the global trends. And I think Morten is the right person. And I'm really saying this is that he is a proven leader in ABB for many years. You can see what he has done with Electrification. So he's helped me to look good. So thank you, Morten. And I think he will continue to drive ABB in the right way. So, thank you.

Gael de-Bray

Thanks very much for this. Can I have a follow-up on the Electrification business area? I mean looking at the strong order intake this quarter, at least versus expectations, do you think business has gained share in particular in the U.S.? Or is the order strength just a fair reflection of the underlying market starting to improve now in short-cycle areas.

Bjorn Rosengren

I think we should be careful talking about shares, but I think we're definitely getting our deserved share of the market. I think the acquisition of GIS have put ABB in a total different situation where we were before. And the excellent job of Electrification to integrate that business and getting the profitability to the right level, actually, of course, have helped us to perform in North America. And I think that is what's reflecting in the 22.5% profit margin that they show, which I think is absolutely top of the top.

Gael de-Bray

Thank you very much.

Ann-Sofie Nordh

Thank you. So we try Sebastian at RBC. Your line should be open.

Sebastian Kuenne

Yeah, good morning, everyone. Yeah. My question is related to the process industries. In PA and Motion, you mentioned the timing of large projects, pulp and paper, food and beverage, and oil and gas being an issue for order intake. In your view, how much of this delay is stemming from higher interest rates or higher and longer -- higher for longer interest rates, I should say. And how much is really softer underlying demand? And what would that mean for the rest of the year in Process industries? Thank you.

Bjorn Rosengren

Yeah. Maybe I can answer that question. When you see 20% down in orders, I think that is a miss showing of the real what's going on in the market. The book-to-bill, even though we had, what was it, 15% growth? What did we have in --?

Timo Ihamuotila

12%.

Bjorn Rosengren

A 12% revenue growth, but we still had a positive book-to-bill of 6% higher orders, which shows that, that market really continues to drive even though we deliver really good volumes at the moment. PA is probably the business area besides Electrification that is very much driven by the traditional industry that are transforming and new industries like batteries, like hydrogen and this exciting new market. And we don't see any slowdown in this. We think this will continue until the world have transformed towards more renewables and low-carbon society.

You know I'm a strong supporter of the process automation and I'm even more positive now and I see the margin development in that business, which is magnificent from my perspective.

Timo Ihamuotila

Yeah. And let's remember, the 14th quarter with positive book-to-bill in a row.

Bjorn Rosengren

14th quarter, yeah, that's quite unique.

Sebastian Kuenne

But you mentioned the same for Motion as well. It's not just Process Automation, you also mentioned timing of projects, pulp and paper, and food and beverage. So is there an underlying temporary softness in these --

Timo Ihamuotila

These are different things, sorry, can I?

Bjorn Rosengren

Yeah, you can answer that.

Timo Ihamuotila

Because on Motion, we spoke about revenue, i.e., we were not able to revenue as much as we expected in some of this project type business, so timing issues and we expect that to come through quite quickly. Whereas in PA, we actually had a couple of orders, and they are exactly in these new areas of business of renewables and hydrogen and that kind of stuff. And it's understandable because these are growing new businesses. The timing of when you exactly get the order, it's not that easy to assess, but this is the difference between what we said in Motion and in PA.

Sebastian Kuenne

Understood. Could I have a follow-up on E-mobility maybe? I noticed another quite heavy loss of $54 million, which was more than twice the level of Q1 last year in terms of loss and also some kind of stagnation of order intake at around $120 million, $150 million per quarter. Do we see another reset here, another change of strategy or tightening of products? What is happening currently in E-mobility in this market?

Bjorn Rosengren

Yeah. It's correct, yes. I mean this is, I think, a combination of softening in the market. I think we've all seen that the EV vehicle market has plateaued, which is normal when you have a new industry that grows up. First, you see growth, then plateauing a little bit, and then it will take off again. But the sales of EV vehicles have gone down lately, which there are a lot of inventories of cars. You've seen it in Tesla. You've seen it by Chinese cars moving into Europe.

But also subsidies have been taken away in countries like Germany and Italy for EV charging, which have made that some of these charging companies that are normally been investing heavily into the infrastructure are being a little bit careful because they need to make sure that the cash flow is good. I don't think there is any difference in the trends. We strongly believe that the world is going electric in the automotive business and the infrastructure needs to be rebuilt.

When it comes to our company, we are transforming the company from the previous management to the new one. And we have a strategy with a whole new product folio, which being introduced into the market at the moment, which we are very optimistic about. But we still have the leftover from the previous one, which was a much broader portfolio with too many variances and too much inventory that needs to be cleaned up. So it is cleaning in that part. And we are, of course, happy that we can do it in the group without any severe impact for the performance in the group. So I think we can handle it and we believe that the future for electrification, EV charging is bright.

Sebastian Kuenne

Thank you very much.

Ann-Sofie Nordh

Thank you, Seb. And then we open up the line for Delphine at ODDO.

Delphine Brault

Yes, good morning. Yes, you can hear me?

Ann-Sofie Nordh

Yes, we can.

Delphine Brault

Okay. Good morning, all. Thanks for taking my question. I wanted to come back on your free cash flow. In Q4, you said it has to be seen if $4 billion can be a new normal. Now with your free cash flow in Q1 and comment for the full year, are you more comfortable with this level of around $4 billion as being a new normal?

Bjorn Rosengren

Let me say first, have you said $4 billion, Timo?

Timo Ihamuotila

I don't recall that exactly, but let's say, anyhow we can talk about the matter and a little bit about the puts and takes on the cash flow. It's, of course, a good question, and we're super happy with how Q1 cash came in, as we discussed earlier.

But if you look at our new guidance about 5% growth, of course, it's the same guidance and then about 18 margin new guidance. So that would bring compared to last year, maybe $500 million, $600 million or more EBITDA, so D important here now as well. And then if we look at the other cash items sort of tax, finance below the line, there could be a bit of a headwind, maybe $150 million CapEx we have said. We're going to invest more to support our growth agenda, maybe another $150 million.

And then if we come at 10% net working capital to revenue that would maybe tie another 100 with the growth. And with those numbers, you come a bit higher than the $3.7 billion. So then the residual is really depending on if we get the net working capital further down. We're of course doing our best to do so. So knocking at that $4 billion is not entirely impossible. But today, we said we should be at least at last year's level of 3.7.

Ann-Sofie Nordh

Okay. Thank you. Jonathan at BNP, are you with us? Your line should be open.

Jonathan Mounsey

Yes, thanks. I guess since we last had our set of results, you had the buyback announced, sort of delayed about that going into it. It's relatively small, at least in my view. And I think maybe that goes to the point you made around M&A. You said there was a good pipeline. Could you first maybe comment on the areas you're looking to acquire some of the larger areas you're looking tend to acquire and maybe technologies, maybe software.

But also, conversely, you're coming now towards the end of your tenure as CEO, and you had a strategic review at the beginning. We got the four divisions we have. We had some tidy-up, but when we look at it now after running the business as CEO for a few years, what do you think about the portfolio today? And really specifically, my question is focused on Robotics and Discrete Automation. Could perhaps something like a spinout allow the group's investment case to more focus around the electrification themes where things seem to be going so low?

Bjorn Rosengren

Thank you for the question. Let me talk a little bit about our portfolio and our ambition going forward. Coming in, four years ago, we said that we need to get the profitability play, so it's stability and profitability focus. And we had, at that time, 30% of our division in growth mode, which is a small part. Today, the majority of the divisions are in growth phase, which means that -- I mean, it's in Electrification. It is in Motion. It is in Process Automation, where they have taken over the responsibility of M&A activities.

We have also said that there are certain criteria to be part of ABB. One is to be aligned with the purpose. The second one is to be number one or number two in the business where we operate. And the third one is that we need to be in business where you can make money. We don't want to throw good money into bad earnings. So these three criteria.

And I think today, we have a good portfolio with our 19 divisions, well positioned in there. And of course, there are some divisions where we could see some upside, both when it comes to profitability, but of course, also growth and in adding technology to the division. So what the divisions are focusing now, they look at their own portfolio, they're looking at the peers, where do we need to be to continue to maintain our leading position in the market. And that's where we see.

So this is software acquisitions we had. The first one we did this year was AI software company from ETH here in Switzerland, which we have been a part owner and supporting them in the growth. Now we picked up the whole part, and we think this is good add-on to the robotic AI portfolio that we have. And the second one is service in electrification in North America, where we think that it's about helping our customers in their electrification and their transformation. And this is the service company that is doing that.

We think it's also perfectly positioned when we look at these trends that are taking place. And we really want to continue this. So we're encouraging the divisions, both to make full M&A acquisitions, but also do minority investments in start-ups with certain technology that can be successful and can be challenging our own technology in the future. So I think the activity is good there. We need capital available for that and I think --

Timo Ihamuotila

Do we have it?

Bjorn Rosengren

Yeah, we do. But we still have over capacity on that part. And that's why we have announced the $1 billion buyback. So maybe you talk a little bit about that.

Timo Ihamuotila

I mean, of course, no drama there. I mean the only difference in the buyback is that it's now a little bit shorter because we would like to be able to announce all the stuff relating to sort of shareholder distribution and the capital allocation at the same goal. And it's now possible with this new capital band in Switzerland. So that's why we said that the buyback runs from now until end of January when we then come out with the full year results.

But exactly as Bjorn said, the share buyback for us is up to $1 billion exactly for the reason that we would rather deploy capital in value-adding acquisitions. So that's number three. Share buyback is number four. But of course, if we have extra capital, we think it's a good in where to deploy it into ABB as well.

Ann-Sofie Nordh

Okay. Yes, Jonathan?

Jonathan Mounsey

On Robotics, any -- Robotics and Discrete automation, any comment about that within the portfolio?

Bjorn Rosengren

I mean, these are two divisions, as we know. And Robotics, we are number two in the market. We have a very strong position in both Europe and in China. We have more to do in North America, but we have invested, as you know, in a production facility there and a lot of activities, especially in the logistics markets, which is doing quite good.

On the Machine Automation, it's a small niche business where we support machine builders. So it's OEM customers. It's a very, very specialized business, but very profitable. And if you look over a cycle, it's almost growth of 10% in revenues during the year. So it's a small exciting business, but very niche.

Ann-Sofie Nordh

Okay. And then we move on to Bernstein, and Alasdair your line is open.

Alasdair Leslie

Yeah, hi. Good morning. Thank you. Sorry, I was cut off earlier, so we fully apologize if you've already covered some of these, but a few follow-ups, please. First one, you said the backlog now machine builders is going to hold you until this summer. So just wondering whether you sort of see a risk to sales in the second half and an air pocket there? Are you kind of comfortable that customers are going to start placing orders again, I guess, maybe in Q3 and your conversations with the machine builders kind of indicate that?

Also linked to that, I suppose, a follow-up on the comments on China and industry and just how broad-based that is, was that a sequential pickup you saw towards the end of the quarter? Just trying to reconcile those comments with perhaps more cautious updates from automation peers during the quarter. Was your view kind of more censored around Robotics specifically?

And then just a final question, if I could squeeze it, on the U.S. commercial strength. Just wondering how broad-based that was? Are you still seeing pockets of weakness in areas like offices? I don't know how much leverage you've got to those areas, but maybe some more color on the different verticals. Thank you.

Bjorn Rosengren

That was a lot of questions, but let me start talking a little bit about Machine Automation. And it is correct that we've seen low orders. On the other hand, during the supply chain issues we had with the semiconductors, we had a huge order backlog buildup during that period. And as we are dealing with OEM customers, not distributors here, our equipment goes into the machines. So depending on how many machines they are building that is going to be the demand.

And we've been delivering from that order book now for more than a year. And yes, it's correct. We're getting closer to the end of that big part. And we said during summer when -- the most of it is delivered out what we have in orders today, then depending on what the orders are being placed from these OEM customers are doing. They had, of course, placed preorders and those are the ones that we've been living from. Now when you get lower, we'll see how that business is developing.

On the other hand, I just would like just to mention today that Robotics and Discrete Automation in the whole is about 11% of our total sales today.

Timo Ihamuotila

Yeah, maybe just on the order dynamics a little bit. I mean we said after previous quarter that we would expect orders to have bottomed and now to move up. So we had like $550 million orders Q4. Now we had about $700 million. We would expect that to continue to notch higher. And also in machine automation, this was the first quarter where we actually saw a sequential growth in orders, very low level, but sort of a sequential growth in orders. So in that sense, sort of it's moving to the right direction. Very difficult to call in the end, what happens after end of the summer. But our base case is that we start to see short cycle improve also there when the machine automation, when the inventory is really depleted, which we expect it to run through. There was still a question, right?

Ann-Sofie Nordh

There was, sort of on the Robotics side. I think did we drill in for that sufficiently?

Timo Ihamuotila

I think we sort of already covered it.

Bjorn Rosengren

I think we covered that, yes.

Ann-Sofie Nordh

I guess, are you happy, Alasdair? It's a better way of putting it.

Timo Ihamuotila

Well, there was something in the U.S. real estate -- U.S. commercial real estate.

Bjorn Rosengren

Yeah, it was on the real estate I think, yeah. U.S.

Timo Ihamuotila

Yeah, I mean, our commercial real estate, I don't have data down wherever it goes. But of course, there is other stuff than what you mentioned. So stuff like hospitals and airports and distribution centers and all kinds of things. So it's sort of broader, yeah.

Bjorn Rosengren

But I think it's fair to say our smart building part of U.S. is quite small, in the whole part. I mean it's in Germany where we see big percentage points of the Electrification business. Otherwise, it's really marginal.

Ann-Sofie Nordh

Okay.

Alasdair Leslie

Thank you.

Ann-Sofie Nordh

Fully covered, we hope. And we'll take the last question for today from Andy at JPMorgan, please.

Andy Wilson

Hi, good morning. Thank you for squeezing me in. I'll make it quick. I'm just interested if there's any kind of update on pricing dynamics across the businesses. I'm just interested, given we're expecting, I guess, a normalization from obviously, what's been a very, very good period of pricing. But in the orders, given what feels like very good momentum in particularly a couple of areas. Just if there's any change in terms of optimism or maybe we could see a better kind of price outcome for the year? And I guess, to square that off conversely, if there's any areas which have proven a little bit more difficult?

Bjorn Rosengren

Let me start a little bit and then Timo can fill in. And I think we said that in this quarter, we had 1% volume and 1% price. That is in the product business. I think that is pretty clear.

When we look at the project business, it is very difficult to measure actually what is the price increase because it's more project oriented. But what you can see is that the gross margin in our order book continues to grow. So I think that is a sign that we are getting good paid for the value that we are offering and delivering out.

And that is a little bit of a hidden in our numbers. And also, the price increases in service is also not part of this 1%. And we've seen 14% growth in service, which is a huge number, I would say. And we know that we are getting good paid also for those products, yes. And I think that is the underlying driving of the gross margin that we are seeing. So it's not only the numbers that we are mentioning. Maybe you want to --

Timo Ihamuotila

Yeah. No, I was going to say a similar thing that I mean, if there is one really, really nice number in this result, it's the whole gross margin being over 37% and all business areas went up in gross margin. So that's also super nice to see.

And I totally agree with Bjorn that part of that gross margin improvement is also coming from better execution of pricing in some of these areas like project and service, which is more difficult to capture. But of course, super well done by businesses also on driving the efficiency and supply chain and all those things. So really, really good gross margin.

Bjorn Rosengren

And I think it really reflects itself in the margin for the Process Automation business, which is on a record high level.

Andy Wilson

Thank you.

Ann-Sofie Nordh

Okay, thanks Andy. And with that, we close for today. Thanks for joining us, and we'll see you in a quarter's time, if not before. Thank you.

Timo Ihamuotila

Thank you. Thank you.

Bjorn Rosengren

Bye. Thank you.