ABB Capital Markets Day 2020 (Industrial Automation)

Hello and welcome back to the last session of our Capital Markets Day. We're going to hear from another two business areas, and we're starting off with Industrial Automation where we have Peter Terwiesch and we also will have Brandon Spencer with us online from the U.S. And without further ado, I will hand over to Peter. Please go ahead.

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Thank you, Peter. I'm really pleased to be here today to talk on behalf of Energy Industries—to share a little bit about where we're going as a division and how we drive value internally and also for our customers. What you see on the right-hand side of the screen here is where we're going as a division. We're going to drive our profitability up between now and 2023. We're going to continue to drive our impressive return on capital up between now and 2023. And you've heard Peter talk about it, you've heard Björn and Timo talk about it, some of the other leaders—profitable and stable before growth.

We're not going to give up on growth in Energy Industries because there's absolutely opportunity for us. But we are going to focus on making sure that we're profitable and stable. So how do we do that? If you look at the left-hand side of the screen, it's about being a leader in automation, it's about driving innovation forward. We're a technology company—what can we do in order to continue to drive a carbon-free society? Even in our traditional businesses, where can we help with that along with other parts of our technology? It's around innovation in digital—digitalization. You heard Peter talk about the 400-plus million dollars as part of Industrial Automation; 200-plus million of that comes from Energy Industries, and those are pure digital plays—not our DCS offerings and other things, but pure digital business. And lastly, we're going to live to the ABB Way. We're fully empowered to deliver the results, we're fully accountable to deliver those results, and I'm going to step you through a little bit in the next few minutes about how we intend to do that.

Really excited to talk about this slide. This is not yesterday's news—this is today's news. These are wins that we've had since COVID, since the perfect storm that Peter talked about. We talk about oil price volatility, we talk about demand shock, we talk about COVID—kind of the perfect storm in our business. These are wins that our teams around the world have done where we're driving value for our customers. As you work around the chart, you see pure automation business where we're providing the intelligence and brains to run these facilities, you see electrification projects where we're working together with our brothers and sisters from EL and from Motion in order to deliver superior value to customers, you see our digital solutions—again, pure digital solutions—where we're taking data, driving connectivity, and driving value together with our customers. And last but certainly not least, the environmentally friendly offerings. So yes, we have the conventional parts of our business in power generation and oil and gas, but we also have other avenues and other markets that are opening up and are growing in a way that certainly offsets what we see in the downside of our conventional businesses. Really proud of the team, really excited to show the highlights of what we're doing around the world.

As I said a little bit, we've got diversity in our markets. On the right-hand side, you see we've combined power generation, water, oil and gas, chemical refining, the midstream portions of our business—all of those together, which allows us to have pushes and takes against what's happening in the market. You see where there's some growth rates that are happening that are higher than others, and we certainly are confident that the growth rates in some of the emerging segments outweighs the downside that we see in some of our conventional businesses.

When we talk with customers, when I talk with trade media, I'm constantly talking about oil price cyclicality, about the demand for sustainable energy—what does it mean for the customer as they transform and transition their businesses as part of the energy evolution that we're going through—and certainly around digitalization. Our customers are going through it internally, which is really important. ABB is doing it internally, which is really important. But how do we work together, bring in other parties from the ecosystem that play in this space, in order to truly drive value for both organizations? And we'll touch on that a little bit as we continue forward.

We've talked a little bit about the industries, and really my takeaway for this slide is what Peter talked about in his presentation. We serve all these industries—the conventional power, the oil and gas, what we see in alternative energy and where those markets are going. Water—a really important market for us where we're seeing double-digit growth in 2020, and we expect to continue to see that as we go forward. And what are we doing for those industries? We're all about making them safer, smarter, and more sustainable. So whether that's the way we deploy our technology, whether it's the solutions that we bring, the services that we wrap around it, or the digital connectivity that bolts it all together—it's about making our customers' operations safer, smarter, and more sustainable.

What you see here is our portfolio. It's a little bit of a complicated slide, but we want to be transparent with everybody that's watching today. So I'll step through a little bit of detail. What you see at the top is the markets that we serve, and important to note is that we go to market with a multi-channel approach. We believe in EPCs, the engineering companies, end users, OEM channels—all of these ways to get to market, because we want to sell to customers the way they want to buy from ABB. What are we selling? We're selling automation, we're selling electrification, we're selling digital connectivity, and we're wrapping service around all of those—services over 50% of our revenue, so it's a critically important part of our business and certainly a growth engine for us as we go forward. The MES&I is our core business in the middle of the chart—that's our anchor product, all of our current platforms as well as our legacy platforms. And then we have the specialty portfolios at the bottom of the chart. These are areas where we're market leaders, and these businesses sit within Energy Industries, so we have responsibility for the product development, the roadmaps, the marketing, the go-to-market—all of these elements.

Also important—we do a lot of pull-through volume with our brothers and sisters in EL and Motion. It's critically important for us because we're delivering solutions to the customer, and so we want to make sure we provide best-in-class technology, domain expertise, project execution—all these things. And where it's not part of ABB, we work with third parties in order to make sure that we can deliver that turnkey solution that drives value for our customers.

So let's talk a little bit specifically about automation—winning in greenfield and in brownfield, very important for us. And there's three pillars that I want to focus on. The first is technology, where we want to be innovative and continue to lead in technology. So whether that's new product offerings, whether that's Edge, Atgenius, and Genix, and the digital connectivity elements that we talked about—all of those things complement our strategy and the strategic pillar for being a leader in technology. Technology feeds into execution. Execution in our markets is critically important, whether it relates to safety, the environmental impact, cost, schedule, risk. I'm very excited to share with you all that we launched a few weeks ago ABB Adaptive Execution. We're going to play a short video for you here in a second, and in that video it shows what are some of the elements that wrap into adaptive execution.

[Video plays on adaptive execution.] I get absolutely charged up every time I see that video, and it's really exciting what we're doing there. It wraps around people, around process, around technology, and around infrastructure in order to deliver costs, quality, and schedule to our customers. There's a benefit inside ABB as we modernize things and streamline and standardize what we do in order to affect quality and drive profitability. There's a benefit for our customers around the capex side into the operating side, and certainly around the quality that they receive. Really excited about the launch of this program globally for us.

Last but not least is services—being the life cycle partner. Peter talked about the duration of these projects. The capital side of the project can go two, three, four, five years until the technology is deployed, then it runs for the next 20, 30, 40, 50 years. Service is our intimacy with the customer—that's how we connect. COVID has certainly been a catalyst for some of this connection and digital connectivity, as Peter touched on with the collaborative operations centers. We will continue to drive value and find strategic offerings that we have, which really help ABB and our customers to be more productive as we go forward.

We talked about environmentally friendly solutions, and I want to dive a little bit deeper on that. As Peter said, we could give a full presentation on this topic, but I want to show some real examples of where we're doing it. Again, when I'm talking to customers, we're talking about resource efficiency, we're talking about new energy models—renewables, hydrogen, carbon capture—all these different types of potential energy sources. And we're talking about a responsible use of resources, like we talk in water all the time. So what's ABB doing about it? On the right-hand side, you see a couple of examples: electrifying the seafloor—taking off a gas turbine from the topside of a facility, emitting carbon, and electrifying the seafloor, driving up reliability, availability, and reducing the environmental footprint; the first green hydrogen facility in Europe, where ABB is providing the intelligence; in Bangladesh, a solar facility where we're providing intelligence and digital solutions as they diversify their power generation sources.

And last but not least—and really important here—is that we don't just talk about it externally; we live it internally. This is a collaboration story between ourselves and EL, where we make an ABB facility carbon neutral. And this is done together with products from our brothers and sisters. My division is providing some of the intelligence and digital applications. So I think it's really important that we focus on that. We're delivering these solutions to ourselves, and so there's clearly value in there that we can deliver to the customers.

I touched on digital—want to give a feel for where we are and where we're going. 200 million-plus dollars in terms of the revenue portion of Energy Industries—an impressive CAGR, an impressive growth rate that we've had organically, along with some partnerships that we continue to use to drive and serve value to the customer. Where are we going? We're going to double this business. So I mentioned profitable and stable before growth—this is an area of growth for us, and it's an area that helps also drive profitability for ABB and value for our customers. Whether it's our own niche solutions, whether it's wider enterprise offerings where we're connecting different customer sites, or whether we're just driving efficiency—all of our solutions with ABB Ability, with Genix, with Atgenius, and with our homegrown solutions that are part of Ability in IAEN, we are focused on delivering value through our digital growth.

Quality of revenues is a theme that you've heard today, and stable and profitable before growth is a theme that you've heard today. This is what it means in IAEN. We manage our portfolio annually, which you see on the left-hand side of the slide, and we'll continue to do that. Are we the best fit? Is this product, is this market where we want to play and where we can add value? What are we doing about it? We'll target growth—whether it's in service, whether it's in channels, whether it's in digital, some niche places where we play in specific markets—we'll target that growth. We're going to work on some of the hygiene elements of our business as well—so whether that's units that are underperforming, for example, we're going to fix them; products where we aren't exactly at the margin corridor that we want to be at, we're going to address it. And lastly, some bid selectivity—we want to make sure that we're focused on winning in markets where we can deliver value to customers and we can get paid for that value back to ABB and thus to our shareholders.

We'll do all of this by leaning into the ABB Way. What you hear Björn, Timo, the rest of the executive committee talk about externally is exactly the messaging that comes internally, and we fully support it. We're adopting it, we're implementing it, and we're going to help use it to drive results. The decentralization that you hear is real—the connectivity to performance, whether it's through the scorecards, whether it's through the annual incentive plan—all of these things to truly drive ownership. We have a motto in IAEN called TEAM, which is Transparent, Empowered, Accountable, and Made Simple. All of these fit perfectly within the ABB Way.

So as I close here, what you see on the left—that's my commitment to you. It's the commitment of my leadership team to you, and it's the commitment of our 8,000 loyal employees that are serving our customers every day, to go deliver those results as we lean forward. With that, I hand it back to Anssi to start the question-and-answer period.

Thank you, Peter and Brandon. We now go into the Q&A session, and as promised earlier on today, we'll tune in Guillermo for his question to Peter. Please go ahead, Guillermo.

Thank you again, Anssi. The question is again in regards to Process Automation and portfolio management, and going back to the issues of low growth and low market positioning. I was wondering if, apart from Turbocharging, you can actually do more portfolio optimization with, for example, instrumentation or O&G, or is it the case that the energies from doing that portfolio utilization are greater than the potential uplift that the group would do by doing some actions over there? Thank you.

Thank you. And we have the next question from Andreas at JP Morgan. Please, Andreas, your line should be open.

Yeah, good afternoon. Thanks for the time. I have a question on the margin target. If you could clarify that—this morning I think it was mentioned that the 14% would also need or include some M&A where you basically buy some higher-margin businesses. We've talked about adding more devices to that process automation business for maybe the last 20 years—in terms of, I think, past management called it having more products to hang on the DCS Christmas tree. What has happened here on M&A, and is that still a focus? Why have you not been able or willing, or didn't it happen in terms of all these add-on acquisitions that we talked about over time? Thank you.

Is the 14% margin target organic, or including an acquisition that replaces the high-margin Turbo business?

Thank you for that. We'll take the next question from Martin at Citi. Please go ahead.

Yeah, thanks. It's Martin from Citi. Just a couple of questions if I can. The first one is just following on from the margin question—you do target a good increase in return on capital as well. Would that include any goodwill and so forth that you would need to spend on acquisitions? And the second question was—we've talked about this in past investor days—some of your peers have talked about ABB losing market share, and obviously there's many parts to the division, and some of those like conventional power, as you say, have been weaker than expected. Has that growth differential simply been a mix effect, or have you seen any sort of end-market share changes over the last two or three years? Thank you.

Thank you very much—there's a challenge for you. We'll take the next question, please, from Will at Kepler Cheuvreux.

Two questions. The first one is: when we think about your strategy to grow in digital solutions and digital business over the coming years, how do you anticipate the success there? Is it mainly building on instrumentation and digital offerings to your existing systems like 800xA or Symphony, or do you also have a strategy to attack some of your competitor systems, such as DeltaV or the Foxboro system? Where does the growth come from in digital, and do you have a strategy to attack the existing incumbent competitor systems? The second question is about Measurement & Analytics. When we look at the competitors in Measurement & Analytics, their returns are much higher than the ones that you are suggesting here. Are we just looking at the returns today being impacted by the cyclical downturn in a number of your end markets like oil and gas, or is there a structural difference in the returns you achieve in Measurement & Analytics compared to your competitors? Thank you.

Thank you. And with that, we're going to have to close this Q&A session.