ABB Annual Report 2012 PDF - ABB Group Annual Report 2012

A third way is our ability to combine both power andautomation technologies into packaged solutions thatmeet the needs of new growth sectors, such as integratingrenewable energy into existing power grids, providinghigh-efficiency power and automation solutions to the globalrail and marine transportation industries, and providing theinfrastructure needed to rapidly charge electric vehicles. Forexample, in 2012 we embarked on a project to bring cleansolar energy to South Africa through two photovoltaic powerplants equipped with ABB inverters, specialized transformersand control software. Other key orders in 2012 included raildevelopment projects in Brazil, India and Poland, fuel-efficientpropulsion and control systems for large cruise vessels,and an order to provide a national electric vehicle chargingnetwork in Estonia. We view this convergence of powerand automation technologies as a long-term trend for whichABB is well positioned.Economic uncertainties continued in 2012, especially onincreasing concerns surrounding sovereign debt levels inEurope and the United States, rising inflation in some emergingeconomies and signs of economic slowdown in mostregions. However, the broad scope of our business portfoliohelped us mitigate some of these developments. For example,growth initiatives in Discrete Automation and Motion andin Low Voltage Products helped to offset early cycle weaknessin these divisions. At the same time, we could build onour strong position in the later-cycle upstream oil and gas andminerals sectors to drive solid order growth in Process Automation.In 2012, we stabilized Power Products margins despitethe challenging market environment through successful costsavings and productivity improvement measures as well asour ability to be more selective in the orders we take, thanksto our broad product and geographic scope. In December2012, we announced the repositioning of our Power Systemsdivision to focus on higher-margin products, systems, servicesand software activities, together with revised targets forthat division. Our strong positions in fast-growing emergingmarkets and selected mature markets, our flexible globalproduction base and technological leadership, as well as theoperational improvements we continue to make in our businesses,also supported our business in 2012.Foremost among these improvements was the successfulreduction of costs to adapt to changing demand. Savingsin 2012 amounted to more than $1 billion and were principallyachieved in three areas: making better use of global sourcingopportunities; eliminating operational and process inefficiencies;and optimizing our global footprint to match thegeographic scope of our business with changing demandpatterns, such as rapid growth in emerging markets. Ourcost reduction program was key to maintaining profitabilityin a challenging environment.Strategy 2011–2015In November 2011, we announced an updated strategy for theperiod 2011 to 2015, along with financial targets to measureour success in achieving them. The strategy is based on fivepriorities:– Drive competitiveness in our current markets by developing,producing, sourcing and selling to better match marketneeds, thereby profitably growing the business whileincreasing productivity and quality.– Capitalize on megatrends, such as the growing need forresource and energy efficiency, increasing urbanization,electrification, digitization and growth in emerging economies.– Expand our core businesses to secure the next level ofgrowth, for example, growing the service business by tappingopportunities in our installed base andby building the software business for our core power andautomation customers.– Execute a disciplined approach to value-creating acquisitionsthat close key gaps across product, end market andgeographic lines.– Find and exploit disruptive opportunities, such as theapplication of direct current electricity solutions to improvepower efficiency and performance compared to conventionalalternating current technologies.In addition, we provided updated financial targets at the Groupand divisional levels to measure our performance. Also in2011, we modified our previous Group operational profitabilitytarget to Operational EBITDA as a percentage of operationalrevenues (Operational EBITDA margin) versus the previousmeasure of earnings before interest and taxes (EBIT) as apercentage of revenues (EBIT margin) – for a full definition see“Performance measures” below. We believe this more accuratelyreflects the operational performance of the companyduring a phase of growth through acquisitions by eliminatingsome of the non-cash effects on earnings from acquisitions.Furthermore, we introduced a new target measure of cashreturn on invested capital (CROI) that we believe providesa more accurate reflection of our operational performance byfocusing on cash returns, which are less prone to nonoperationalaccounting adjustments that may be applied toEBIT from time to time. CROI is defined as the total of netcash provided by operating activities and interest paid, as apercentage of capital invested. Capital invested is definedas the total of fixed assets, net working capital and accumulateddepreciation and amortization.OutlookOur long-term growth drivers – such as the need for greaterindustrial productivity, more reliable and efficient powerdelivery and growth in renewables – remain in place. Shortertermtrends such as industrial production growth andgov ernment policy are expected to be the main determinantsof demand in 2013.ABB Annual Report 2012 | Financial review 47