In 2016, we continued our Next Level transformation aimed at accelerating sustainable value creation and achieved significant results in our three focus areas: profitable growth, relentless execution and business-led collaboration.
To drive a growth mindset, we adopted our “PIE” formula of penetration, innovation and expansion, with a focus on greater competitiveness, organic growth, and reducing risks by aligning business models more closely with our core competencies. In 2016, the PIE initiatives helped mitigate market headwinds resulting in a stable revenue development in local currencies (however, in U.S. dollars revenues declined 5 percent). There was positive demand in strategic growth areas such as food and beverage and robotics, while demand from other areas such as process markets remained subdued. Improving growth momentum resulted in order growth in the fourth quarter of 2016, supported by strong growth in key markets such as the U.S. and China.
At our Capital Markets Day in October 2016, we announced our decision related to the strategic portfolio review of our Power Grids division. We intend to continue the Power Grids transformation under ABB’s ownership, with the focus on high-growth segments and digitally enabled services and software. As part of the ongoing transformation, we intend to continue to de-risk the Power Grids business model while tapping growth opportunities through strategic partnerships, such as those with two leading EPC companies, Fluor and Aibel, announced in 2016. The Power Grids division won large orders in the fourth quarter of 2016 reflecting customer trust in ABB’s portfolio. These large orders included a $640 million UHVDC systems order for Raigarh-Pugalur in India and a $100 million order for the upgrade of the Sylmar converter station of the Pacific Intertie high-voltage direct current power link in the U.S.
We laid the groundwork for future growth with our quantum leap in digital – around ABB Ability™ – which we launched at our Capital Markets Day in October 2016. ABB Ability™ combines ABB’s portfolio of digital solutions and services across all customer segments, cementing our leading position in the Fourth Industrial Revolution and support the competiveness of our four entrepreneurial divisions. We entered into a far-reaching strategic partnership with Microsoft to develop next-generation digital solutions on an integrated cloud platform. We believe that our customers will benefit from the unique combination of our deep domain knowledge and extensive portfolio of industrial solutions and Microsoft’s Azure intelligent cloud, as well as B2B engineering competence. Together, we believe the partners will drive digital transformation in customer segments across ABB’s businesses such as robotics, marine and e-mobility. Our digital transformation will be led by our Chief Digital Officer, Guido Jouret, a pioneer in the Internet of Things, who joined ABB on October 1, 2016, reporting to our CEO, Ulrich Spiesshofer.
As of 2017, ABB is driving growth in four market-leading entrepreneurial divisions: Electrification Products, Robotics and Motion, Industrial Automation and Power Grids. The new division structure was effective January 1, 2017, and is now fully operational. The divisions are expected to drive growth as entrepreneurial units within ABB, in line with one of our core values – “ownership and performance”. This is reflected in an enhanced performance and compensation model, which focuses on individual accountability and responsibility. The divisions benefit from sales collaboration orchestrated by ABB’s regions and countries as well as from the group-wide digital offering, a low-cost centralized administrative structure, common supply chain management and corporate research centers. We plan to continue to strengthen our divisions through active portfolio management. This includes pursuing strategic additions, transforming business models and pruning non-core businesses.
The transformation of Power Grids continues. In 2016, the division increased Operational EBITA by 16 percent, mainly driven by improved productivity, solid project execution and continued cost savings. These results reflect the success of the previously announced “step change” program to date. Going forward, the division is expected to continue to drive further transformation and value creation through its previously announced “Power Up” program. In light of this strong operational excellence performance, ABB increased the profitability targets for this division effective January 1, 2018.
A key objective of the Next Level strategy is to achieve world-class operational excellence at all levels of the company. The White Collar Productivity savings program has outperformed expectations since its launch in 2015. As a result we increased the program’s cost reduction target by 30 percent to $1.3 billion. In 2016, the White Collar Productivity savings program amounted to $0.6 billion. We also continued to deliver on our regular cost-savings program of achieving savings equivalent to an expected 3–5 percent of cost of sales each year. We continued to execute our Net Working Capital program, which aims to free-up approximately $2 billion from 2015–2017. In 2016, we reduced working capital by around $550 million bringing the total reduction to $900 million for the first two years of the program.
In addition, we continued to align and drive our new performance-based compensation model, which has been implemented for 70,000 of our 132,000 employees.
We are adopting a single corporate brand, consolidating all our brands around the world under one umbrella. Our portfolio of companies is being unified, showcasing the full breadth and depth of ABB’s global offering under one master brand. The unified brand plays a key part in realizing the value potential of our digital offering, as we expect it will increase brand loyalty, price premiums and purchase probability. The brand features design elements intended to clearly articulate ABB’s vision, direction and unique market position to customers, shareholders, employees and all other stakeholders. Our heritage as a pioneering technology leader and the three focus areas of our Next Level strategy are reflected in our new brand promise: “Let’s write the future.”™
Over the past two years, we have simplified our organizational setup, reducing the number of global regions from eight to three, and the divisions from five to four. In addition, many business units have been relocated closer to their key markets and customers, leading to a more responsive, customer-focused organization. The work is not over, but today ABB is a simpler, faster and more agile company, positioned at the heart of the Energy and Fourth Industrial Revolutions, and ready to take advantage of the exciting growth opportunities that are emerging across its markets.
Next Level strategy – stage 3
On October 4, 2016, we launched stage 3 of our Next Level strategy to unlock additional value for shareholders and customers. Building on the focus areas of profitable growth, relentless execution and business-led collaboration, stage 3 consists of four actions:
- Driving growth in four market-leading entrepreneurial divisions,
- Quantum leap in digital,
- Accelerating momentum in operational excellence, and
- Strengthening the global ABB brand.
Driving growth in four market-leading, entrepreneurial units
We are driving growth in four market leading entrepreneurial divisions: Electrification Products, Robotics and Motion, Industrial Automation and Power Grids. The new division structure was effective January 1, 2017, and is now fully operational.
A quantum leap in digital with ABB Ability™
The ABB Ability™ offering combines our portfolio of digital solutions and services across all customer segments, cementing our leading position in the Fourth Industrial Revolution and supporting the competitiveness of our four entrepreneurial divisions. With ABB Ability™, we see an annual addressable market of up to $20 billion.
Accelerating momentum in operational excellence
The White Collar Productivity savings program is on track to deliver the increased cost reduction target of $1.3 billion (run rate end of 2017). We intend to achieve these additional savings within the initially announced timeframe and for approximately $200 million lower of total combined restructuring program costs and implementation costs than initially announced in 2015. We are continuing our regular cost-savings programs to achieve savings equivalent to an expected 3–5 percent of cost of sales each year.
We continue to deliver on our Net Working Capital program which plans to free-up a total of $2 billion by the end of 2017. In the first two years of the program, we have freed up approximately $900 million.
Strengthening ABB’s brand
We are adopting a single corporate brand, consolidating all our brands around the world under one umbrella. Our portfolio of companies is being unified, showcasing the full breadth and depth of our global offering under one master brand. The unified brand plays a key part in realizing the value potential of our digital offering, as we expect it will increase brand loyalty, price premiums and purchase probability.
Our shareholders are expected to benefit from our expected strong cash generation and financial position through a new share buyback program of up to $3 billion from 2017 through 2019. In addition, the Board of Directors is proposing an eighth consecutive increase in the dividend to 0.76 Swiss francs per share at the 2017 AGM.
ABB’s capital allocation priorities remain unchanged:
- funding organic growth, research and development, and capital expenditures at attractive cash returns,
- paying a steadily rising, sustainable dividend,
- investing in value-creating acquisitions, and
- returning additional cash to shareholders.
As a pioneering technology leader, committed to unlocking value, we believe we are well positioned to capture growth opportunities as the Energy and Fourth Industrial Revolutions unfold. We have a clear transformation plan to drive earnings per share and cash return on invested capital, as well as an efficient balance sheet to generate attractive returns for shareholders.
Macroeconomic and geopolitical developments are signaling a mixed picture with continued uncertainty. Some macroeconomic signs in the U.S. remain positive and growth in China is expected to continue. The overall global market remains impacted by modest growth and increased uncertainties, such as the United Kingdom’s potential withdrawal from the European Union and geopolitical tensions in various parts of the world. Oil prices and foreign exchange translation effects are expected to continue to influence our results. With this and the ongoing transformation of ABB, we expect 2017 to be a transitional year.
The attractive long-term demand outlook in our three major customer sectors – utilities, industry and transport & infrastructure – is driven by the Energy and Fourth Industrial Revolutions.
We believe we are well positioned to tap into these opportunities for long-term profitable growth with our strong market presence, broad geographic and business scope, technology leadership and financial strength.