ABB CEO: «All Our Businesses Are on the Lookout for Potential Acquisitions»
Björn Rosengren, CEO of Swiss industrial giant ABB, looks ahead with confidence after a good business year despite delivery bottlenecks. After a series of divestments, he now wants to focus on acquisitions.
ABB reports a record high order backlog for 2021. Demand remains particularly strong in the key US market. But revenue growth and profitability are not quite keeping pace. Supply bottlenecks, especially for semiconductors, and rising input costs are making it difficult for the Swiss industrial and technology group to excel.
This is also the reason for the muted outlook for the current year, which market participants criticized on Thursday. «We don’t see any slowdown in our markets», says CEO Björn Rosengren in an in-depth interview with The Market NZZ. The main challenge for ABB now is to convert orders into sales.
2022 will not only be exciting in operational terms. ABB is planning three divestments: in addition to the planned IPO of the E-mobility division, the Turbocharging division will likely be spun off to shareholders. ABB will now be shifting gears and focus on acquisitions, says Rosengren: «We have identified about one hundred companies that we would potentially like to buy.»
«We have been able to pass on most of the cost increases»: Björn Rosengren.
Mr. Rosengren, how has ABB started into the new year? Which segments and geographies show good dynamics?
We have a pretty good picture of where we are in terms of orders for the first three weeks of the year. What I can say is that the demand continues broadly at the same level as in the fourth quarter. The strongest market is North America, followed by Europe. The picture is somewhat weaker in Asia.
You gave a muted outlook for 2022, which has caused some disappointment in financial markets. Is your visibility that weak?
In general, we believe that the year should be pretty strong. We don’t see any softening in our markets, most segments should remain good. The most important challenge for ABB now is to turn orders into revenues. As you have seen, our orders in Q4 2021 grew by 21% compared to the year before, so we have a lot of products that need to be delivered this year. Our focus is to get the supply we need, such as semiconductors, and get the products out of the door. The real number in terms of our revenue growth will depend on the supplies we get. Therefore, we will probably see a somewhat tougher environment in the early part of the year. We feel very comfortable about the second half of the year.
So your muted outlook for the year is because of supply chain shortages? You don’t see any weakening of the general demand environment?
We don’t see any weakening in the demand environment at all. Demand continues to be very strong. The main challenge now is related to what we can get out and bill during the quarter. If we manage to deliver more, this will also support growth and margin development in our businesses. But we are very clear for the full year: In terms of revenue growth, we expect to exceed our long-term targets, and we also expect to take a good step towards our target of getting to an EBITA margin of at least 15% by 2023.
Your organic growth targets are 3 to 5%. So we are talking about more than 5% revenue growth this year?
Yes.
What kind of supply chain issues are you dealing with today? Is it mainly semiconductors?
Yes. In the fourth quarter of 2021, it was much more. It was plastics, it was steel, especially in the beginning of the quarter. October was the hardest month. I think most of this has eased by today. Now the shortages we are experiencing are almost 100% related to semiconductors.
When you say you expect an easing of the supply chain issues in semiconductors towards the second half of the year: On what basis do you make that assessment?
We are basing it on what the suppliers are telling us. We have also done a lot of redesigning and reengineering of our products, where we put in other components of which there is no shortage. The situation varies between the suppliers of semiconductors. Some of them have bigger issues, but some of them are easing up already.
Are we correct to assume that semiconductor supplies are particularly tight in the Robotics & Discrete Automation business?
Correct. It’s in three areas where we see it: In Robotics, in Discrete Automation and also in Distribution Solutions. This division delivers large switchgear equipment that we sell to utilities. These orders came in over a year ago, and they are only now being delivered. They also need a lot of semiconductors. And if you are just missing one semiconductor, you are not able to invoice the whole installation, which has a significant effect. You saw our orders in Q4 were up 21%, while invoicing was up only 8%. If we had more components, we could have had a much higher invoicing.
Many companies are experiencing higher input costs, both in terms of raw materials and in terms of labor. How is it for ABB?
We are in the same environment. We deal with it through our cost management and our pricing strategy. Today, all our businesses have a strong focus on pricing. We have been able to pass on most of the cost increases. When you look at our revenue growth, the pricing effect overall is 3%. In a business area like Electrification, which has been particularly hard hit by rising costs, it was higher. So that’s quite good.
Tight labor markets seem to be a particular issue in North America. Can you give us some color there?
Yes, the impact is strongest in the US. It started during the Covid-19 lockdowns, when people were compensated for not going to work. Economic demand in the US is very strong, you see it in our orders which show a growth rate of 40%. Almost every company in America is experiencing rising demand, which means they all are looking for labor. This is a broad pattern, both in white-collar and blue-collar jobs. People can get salary increases just by switching jobs.
What are we talking about percentage wise?
It varies very much between regions in the US. Where demand is high and the number of available labor is low, wages rise more strongly. But it’s very clear: Labor inflation in the US is higher than anywhere else in the world.
Can you maintain your production capacity in America in this environment?
At the moment, our businesses in the US are dealing with this quite well. We have a lot of factories in America. Some of them struggle, but we manage to ship our products. I must add that I’m not hearing this complaint as much now as I did in October. So there might be some easing up on that issue, too.
In terms of the ongoing portfolio review, you have communicated that the IPO of ABB’s e-mobility division is on track. What is the future share that ABB will hold in this business after the IPO?
We haven’t decided that yet, we will probably decide in the beginning of Q2. According to Swiss regulation, we have to list at least 20% of our shareholding in the business. It will probably be between 20 and 49%, which means ABB’s shareholding after the IPO will be between 51 and slightly below 80%. We will continue to control the business and consolidate it within the ABB Group.
Will the IPO exclusively raise money for the e-mobility business? Or will ABB also sell shares to raise cash for itself?
The money that we raise through the IPO will be used to invest into the e-mobility business. They need to grow, both organically and through acquisitions. We recently announced an acquisition in the US, and we have increased our ownership in Chargedot in China.
The IPO is planned to take place at the SIX Swiss Exchange. Couldn’t you achieve a higher valuation with a listing at the Nasdaq?
The Swiss Stock Exchange has an excellent reputation, ABB is a Swiss company, and we have a solid, high quality investor base here. We came to the conclusion that the Swiss market is the most attractive for our business.
You have communicated that you are leaning towards a spin-off for the Turbocharging division. You haven’t made a decision yet?
We haven’t closed the door to potential buyers yet, but we are leaning towards a spin-off, which I think is really exciting. Turbocharging will be an excellent company on its own. When I was CEO of Wärtsilä, we were probably the biggest customer of ABB’s Turbocharging division. I have been dealing with them for many years. I’m happy for them, and I think they will have an exciting future.
Is there not much interest from private equity?
On the contrary, there is large interest. But we take many factors into account, and today we think that we can get the best valuation by spinning it off to our shareholders. There is no obvious industrial buyer for the Turbocharging business, because the companies that could buy them don’t dare to, because they would then also supply to their competitors. So standing alone makes sense. The company has a good size, it is very profitable, one of the most profitable businesses we have within ABB, and 75% of its business is service, which makes it very resilient in a downturn. In a spin-off, ABB shareholders would get shares of the Turbocharging business for the ABB shares they own.
After E-mobility and Turbocharging, there is only one division left to sell, and that’s Power Conversion. What’s the timing there?
One of the reasons we have waited with that is that these transactions take a lot of work, and we are not in a hurry to sell. These divestments help to align the company with our purpose of electrification, automation and sustainability. We don’t want ABB to be a conglomerate, all parts of the company have to make sense. Power Conversion had a tough year during Covid, their profitability went down a lot. Now they have come back, with very strong orders, their financial performance is going in the right direction. My assumption is that we will start the process to sell this division in Q3.
After that, will you be done with divestments?
We are not here to sell off ABB. We want to strengthen ABB, that is the main focus. Now, all the businesses are looking for potential acquisitions. We should do five to ten acquisitions per year from now on and grow the business. Profitability is coming up nicely, our target of an EBITA margin of at least 15% is getting within reach, our focus now is on growth.
In which business areas would you like to strengthen ABB?
We have four business areas and 21 divisions. In terms of M&A, we have shifted the focus out to the divisions. All the divisions are on the lookout for targets in their markets that would make us stronger than the competition. This is the basis of our M&A strategy. All 21 divisions, when they are profitable enough, should do acquisitions. So when you have 21 divisions identifying 20 companies each every year, there are a lot of proposals coming up.
Do you actually find good targets at reasonable valuations?
Valuations now are very high. Sellers think their companies are worth a lot, especially if they are in the tech or software world. But we identify them strategically, analyze them, and we tell them that we are interested in acquiring them. When they are ready, they come to us. This can be tomorrow, or it can be in two years. It’s important that you identify the targets that make sense strategically.
A year ago, you said that this process needs ramping up. It takes time for a company like ABB to get into acquisition mode. Where do you stand today?
Today, we have identified about one hundred companies that we would potentially like to buy. But as you know, it takes two to tango. The prices need to be right, the return of any investment needs to be in line with the strategic goals of the company. Let’s be clear: Prices in the M&A market are crazy. I mean, you saw the valuation we received when we sold the Dodge division last year.
How do you make sure that you remain disciplined?
It boils down to our governance structure. If a division finds a company to buy, they do the strategic work, then they present it to the business area head. When the business area head thinks it’s a good proposal, it will be presented to the executive committee. If we think it makes sense, it will go to the board. You need to go through several toll gates to get an acquisition project through.
Analysts regularly point out that ABB is rather weak in the industrial software space. Is that an area you’d like to grow through acquisitions?
There are some analysts that criticize us for not buying software companies, like some of our competitors have done. But we have a lot of software embedded in our products, our revenues in the digital field are growing strongly. ABB has built a $500 million plus business in software within our divisions, growing at double digit rates. Would we be interested in making acquisitions in that area? Yes, especially if they are synergic with our businesses. Should we buy a big software platform company? I would doubt that.
So, five to ten acquisitions per year. We are talking bolt-on here, right?
Yes, small to medium sized acquisitions. It could even be division size today. If you had asked me that a year ago, I would probably have said no, but today I would go up to division size. Our shareholders now feel that ABB is stable and profitable enough to be able to handle somewhat bigger acquisitions.
If you made a larger move, in which business area would that be?
There are many possibilities, but I’d say Robotics and Discrete Automation is an interesting area where we would like to strengthen our position. Motion would be another area. I also think a move within Electrification, if it’s the right target, could work. Process Automation has some more work to do to get its margins up.
When you say medium sized, could we be talking about multi billion dollar acquisitions?
Everything has to make sense strategically. I can tell you that to get a multi billion dollar acquisition through, it would be rather difficult both on the level of the executive committee and on the level of the board. But financially, we have a lot of firepower. We have a net cash position, and there is more money coming in. We still own 19,9% in the power grids business that was sold to Hitachi. That stake will be sold off in 2023. We have the necessary cash, but you should never be carried away by that. You know, historically ABB is not so proud about some of the acquisitions that were made.
With so much cash on the balance sheet: Why didn’t you announce a new share buyback or a bigger dividend increase?
We did. We said that share buybacks will continue beyond the program that is related to the sale of the power grids business. This will be an AGM decision, but we definitely plan to continue our share buybacks.
As you have pointed out, the track record of ABB in terms of M&A has not been stellar. How will you build that track record?
You need to earn trust. If we had made a big acquisition two years ago, investors would probably not have been happy about it. Today, our investors see that ABB is well organized, they see that we are doing what we are saying, that we deliver on expectations. This process takes time. I fully respect that. You don’t want to have a management that is overdoing it when it comes to M&A. We have to always realize that we are working with our shareholders’ money. You have to treat it like your own money and not waste it.
Talking about your longer term targets: You have said that you want to achieve a minimum EBITA margin of 15% by 2023. Are we talking about a minimum of 15% throughout the cycle?
Absolutely, that is the minimum figure. This target is not meant to be an average over the cycle.
Margins between business areas and divisions vary widely. How much leeway do you give to the divisions? Will they all need to reach at least 15%?
It would be impossible for all divisions to reach 15%. We need to look at each division on its own. It’s the divisions that need to deliver. We look at where each division is compared to the best peers in their market, and we expect them to achieve or exceed those margins. But there are businesses in our portfolio, for example large motors and generators, where there are very few players in the market which achieve margins of more than 10%. We can’t expect our division to reach 15%.
But your EBITA margin target of at least 15% on the group level is not the end of the rope?
Not at all. But we need to do small, continuous improvement. More focus, leaner, cleaner.
2023 is not far away. What will your next EBITA margin target be?
You know I can’t say that. I always say we first have to reach the target and then we take the next step. But 15% is definitely not the end of the rope. This is a target on the road to be a world-class company.
In terms of your growth targets, with an organic growth target of 3 to 5%, you still seem rather timid compared to your peers. Why is that?
We get this question a lot, but the comparison is not quite fair. If you look at ABB, you are actually looking at 21 individual companies. When I look at ABB, I don’t look at the group level. The corporate level is only 800 people out of 105’000. All other employees are in the various businesses. A division like Drive Products is making a margin that is much better than their competitors, and they grow at least as strongly as their peers. So you have to look at it from a business to business perspective. When we look at our growth targets for each division, I can assure you that none of our businesses are planning to lose market share.
You’ve been CEO for two years now. You have completely rebuilt the organization. Before, it was very centralized, top down. Would you now say that the divisions are in the nimble mode you would like them to be?
We have been operating according to our new model for one and a half years now. Of course, taking up responsibility and accountability is something many people want, but not everyone is made for it. Some leaders may not be up to it and we have addressed that. As you have seen, we have replaced a number of division leaders over the course of the last two years. Some divisions are very far, others still have some work to do. The divisions themselves need to get more decentralized and move accountability out towards their customers. We challenge them constantly and make sure that they become more efficient.
If we take a longer term view, say 2030: What shall ABB be then?
We have a strong focus on electrifying the world, which is a big part of the sustainability transformation, and then we have a similarly strong focus on the automation side. We are the world leader when it comes to automation in process industries, but we are not the world leader when it comes to discrete automation. I would like to see that we strengthen ourselves and move towards becoming number one. This is a constant journey.
You turn 63 this year. How does this journey align with your personal plans?
I don’t see myself as important in this picture. The important people in ABB are the division leaders. If they don’t deliver, ABB won’t be able to deliver. I really mean that, I am not important. It’s the divisions that make the difference.
