Chairman and CEO letter
We are pleased to present ABB‘s Annual Report 2013, which has been expanded to help our shareholders, other stakeholders and potential investors to better understand what ABB does and what makes us successful. We‘ve also included new sections to highlight ABB‘s achievements and to introduce you to some ABB people from our businesses around the world, including our acquired companies. We hope you enjoy reading the new Annual Report.
Record revenues, higher operating profits
ABB turned in a solid performance in a challenging market in 2013. We achieved record revenues, higher operating profits and met our cost-reduction targets. We accomplished this during a year of mixed markets and continued economic uncertainty, as well as internal management transitions, demonstrating the company‘s underlying strength and ability to execute. For the fifth year in a row, we will be proposing a dividend increase at our annual general meeting.
Four of our five divisions performed well, with Power Products continuing to lead the sector in profitability. Our expanded product and geographic scope enabled us to increase profitability in automation across our Low Voltage Products, Discrete Automation and Motion and our Process Automation divisions. We are confident that our Power Systems division will deliver higher, more consistent returns under new leadership once certain legacy projects have been executed and actions to improve risk and project management are complete.
On the order side, demand from early-cycle industry customers was higher in the second half of 2013, reflecting some improvement in business confidence, which gives us reason to be cautiously optimistic for the year ahead. Large orders, however, were significantly lower, primarily because utilities and industrial customers were still hesitant to make big investments given the continuing economic and regulatory uncertainty, and this weighed on our order book. We were also more selective about accepting orders in Power Systems in line with the reset of this division.
Among our best-performing businesses were low-voltage circuit breakers and switches as well as drives. The robotics business had an extremely successful year and continued its successful penetration of the general industry sector. All divisions posted revenue increases, which meant we ended the year with record revenues of nearly $42 billion overall, 7 percent higher than the previous year, in local currencies. Operational EBITDA for the Group was up a healthy 9 percent at $6 billion, even after the $260-million charge related to project delays and operational issues in Power Systems.
Well-positioned for the future
As in previous years, we did not let the economic uncertainty distract us from strengthening our competitive position and preparing our company for the future. We stayed focused on technology innovation with an investment of $1.5 billion in R&D, and we continued to see the fruits of our previous investments in products such as the Emax 2, the world‘s first circuit breaker that not only protects electrical circuits but also adapts energy consumption to actual needs. In 2013, we made significant inroads into new markets and segments, such as electric-vehicle charging and renewable energy generation, and we continued our disciplined actions on savings, taking out $1.2 billion in costs for the year, and cash conversion. More customers than ever tell us that they are satisfied working with us; the number saying they would be highly likely to recommend ABB to a colleague rose to 35 percent in 2013 compared with 29 percent in 2012.
We made substantial progress on the integration of our two biggest acquisitions, Baldor and Thomas & Betts, and we are pleased to report that both are well on target in terms of cost synergies and overall returns on our investments. Business integration will be an important focus in 2014 and in the future, and to strengthen our institutional capability in this area we have appointed one of our Executive Committee members, Greg Scheu, to steer the integration of our acquired companies across all businesses and regions. He will also drive forward our service business, which had another successful year, accounting for an increasing share of overall orders, and he will be based in and in charge of North America, our largest single geographical market.
“We continue to see the fruits of our investments in technology.”
Last year, we continued to expand our portfolio through strategic acquisitions, the most significant of which was solar inverter maker, Power-One, which makes ABB the number 2 global player in the most intelligent part of the solar photovoltaic value chain. Through other acquisitions, we expanded our presence in building automation (Newron), low-voltage products in Turkey and eastern Europe (ELBI Elektrik), measurement products (Los Gatos) and service offering for drives and motors (Dynamotive).
Finally, 2013 was a year of internal transition and we are pleased to share with you that this was achieved smoothly and without any impact on the business, another indication of the underlying strength and robustness of our organization. The CEO transition from Joe Hogan to Ulrich Spiesshofer was seamless, as was the CFO handover from Michel Demaré to Eric Elzvik and the changes in leadership in the Discrete Automation and Motion division, from Ulrich Spiesshofer to Pekka Tiitinen, and in the Power Systems division from Brice Koch to Claudio Facchin. We were also very pleased to welcome on board a highly experienced human resources leader, Jean-Christophe Deslarzes, to succeed Gary Steel, who retired after a long and successful career.
“Our markets offer tremendous growth opportunities through penetration, innovation and expansion.”
We look back on a solid year in 2013 and say with confidence that, despite weaker than expected economic growth and lower industrial capital spending, ABB is well-positioned to drive future growth. We also are humble enough to realize that there is still tremendous potential to improve and do better in serving our customers around the world.
Taking ABB to the next level
In 2014, a key focus will be to set and implement the direction for the next phase of growth and improvement on returns. We have already started this process by conducting a rigorous navigation check on our position in key markets. We now have “heat maps” of customer sectors and geographies ready, so we know where our growth opportunities are and where our investments should be prioritized.
At the same time, we defined three focus areas to provide us with a systematic and robust approach for value creation, enhanced earnings per share (EPS) and cash return on invested capital (CROI):
1. The first is profitable growth, which we are targeting through a formula known as PIE: penetration, innovation and expansion:
Penetration is focused on selling more of our existing offering to accessible customers by strengthening customer intimacy and adapting our offerings to local requirements. As an example, we are investing in factories in emerging markets, such as India and Brazil, to ensure our products are available with high service levels and well-suited to specific market segments while keeping global scale and cost competitiveness.
Innovation refers to the creation of new offerings and value propositions with focused resource allocation, especially on the technology and business model side. A good example is ABB‘s collaboration with the Norwegian oil and gas company, Statoil, to develop subsea solutions for exploration and transmission of electrical power up to 100 megawatts (MW) over a distance of 600 kilometers and to depths of as much as 3,000 meters. This investment will make possible the development of remote oil and gas fields located far from other infrastructure.
The third part of our growth formula is the expansion of our business into new markets and segments. One priority is infrastructure in Africa, which as a continent is growing fast. At its current stage of development, the big economic drivers are mining, oil and gas and power — all key markets for ABB.
2. Our second focus area is business-led collaboration, which refers to the creation of value across our businesses to better serve our customers. We are achieving this by working together across divisions and with our acquired companies to create integrated product offerings, and by collaborating with external suppliers and channel partners as well as along our own supply chain.
“The global ABB team is motivated and committed to take ABB to the next level of profitable growth.”
3. Our third focus is relentless execution, which is already a hallmark of ABB, as evidenced by our strong performance on cost and cash flow. We are expanding the focus on white-collar productivity by improving efficiencies and streamlining processes so we can spend more time on value-adding activities and less on administration.
Read more about our three focus areas.
While we remain cautiously optimistic for the short term, ABB‘s growth prospects in the mid and longer term are excellent. We see an increasing need for efficient, reliable electricity transmission and distribution as well as growing demand for automation solutions. With ABB‘s customer-oriented offering portfolio, we are well-positioned to tap these opportunities. Thanks to our acquisitions, we also have plenty of potential to increase sales of existing product lines through, for instance, the distribution networks of Thomas & Betts, which has a particularly strong presence in the North American low-voltage market.
“ABB has developed a strong position in some of the most important and promising markets of the future.”
ABB has also developed a strong position in some of the most important and promising markets and segments of the future. We are now present throughout the entire renewables value chain, from renewable power generation to efficient power transport and electric mobility, where we are a world leader in direct current (DC) fast-charging technology. Last year, we won a landmark contract to supply a nationwide fast-charging network for electric vehicles in the Netherlands, having already constructed a similar network in Estonia. This year, we will launch high-power DC chargers in China, initially for a new long-range electric car known as the DENZA, which is being manufactured jointly by Daimler and BYD Auto, one of China‘s leading electric-vehicle (EV) firms.
We are also further strengthening our global leadership position in high-voltage power transmission. Last year, we delivered the highest-capacity HVDC Light undersea power connection, linking the grids of Ireland and Wales and enabling wind power integration. We also integrated wind power from one of the largest offshore wind farms in Europe into the Belgian grid.
And we continue to go from strength to strength in robotics. In 2013, we expanded our market share yet again and brought twelve significant new products, solutions and systems to market, one of which allows multiple automobile models to be built on the same production line with world-class flexibility.
See more of our successful technologies under Key achievements of 2013.
ABB is a strong player with a strong team in many markets and sectors. However, when we consider the size of our total potential market, it is clear that we have tremendous growth opportunities ahead. ABB has grown faster than the market throughout the past period characterized by the global crisis. In the next years, we look forward to continuing and accelerating that proud tradition.
We would like to sincerely thank our employees for their commitment, dedication and hard work, and to thank you, our shareholders, for your trust and continuing support. Together, we are making ABB a stronger, more successful company and, in doing so, driving forward our vision of power and productivity for a better world.
Hubertus von Grünberg
March 7, 2014