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ABB updates its 5-year strategy

World Cement,

ABB, the leading power and automation technology group, expects to grow faster than its markets over the period 2011 to 2015 by focusing on sectors where its combined power and automation portfolio offers competitive advantages, increasing market penetration in both emerging and mature economies, and becoming more responsive to changing customer needs and macroeconomic trends.

In its updated 5-year strategy recently announced, the company also said tight execution on cost and productivity – aiming for annual productivity improvements equivalent to 3 – 5% of cost of sales – will further contribute to increasing profitability over the period, along with targeted expansion of its service and software businesses.

“We have executed well and delivered strong results over the last five years, despite going through an historic economic downturn,” said Joe Hogan, ABB’s CEO. “We expect to outgrow both global GDP and our markets, while aiming for higher profitability and earnings per share. Just as important, we aim to deliver reliable cash returns to our shareholders.”

ABB expects to grow revenues from 2011 to 2015 at a compound annual growth rate (CAGR) of 7 – 10% organically, compared to the estimated annual global GDP growth of 3 – 4% and overall market growth of 5 – 6%. Acquisitions made over the period – the size and timing of which depend on market conditions – have the potential to add another 3 – 4 percentage points to the targeted organic growth rate.

The previous EBIT margin target corridor has been replaced by an operational EBITDA margin corridor, as management is of the opinion that it provides a more accurate picture of the company’s underlying operational performance. In addition, return on capital employed has been replaced by a measure of cash return on invested capital.

“This aligns us better with shareholders’ interest in cash returns and excludes non-operational accounting impacts which distort the company’s reported business performance,” said Michel Demaré, ABB’s Chief Financial Officer.

ABB’s strategy is built around five components: increasing competitiveness by matching production to local market needs while driving productivity and quality improvements; capitalising on macro trends such as emerging market growth, resource efficiency and climate change where markets are growing faster than global GDP; leveraging its leading market positions and technologies in core businesses such as power grids and industrial automation to take market share; continuing its successful acquisition policy to accelerate growth in priority gap areas; and exploiting disruptive opportunities, such as direct current (DC) technologies, to enable a wide range of energy efficient automation and power solutions.

Cost competitiveness will remain a key management priority, with the focus remaining on global sourcing, operational excellence initiatives and optimising ABB’s global footprint to better balance costs with market growth. In line with its ambition to improve productivity every year, ABB expects to save approximately US$1 billion in costs in 2012.

Technology and R&D will remain core to ABB’s long-term strategy, with growth in R&D investments expected to outpace revenue growth over the 2011 to 2015 period.

ABB also published revenue growth and operational EBITDA margin targets for its five divisions, reflecting the company’s ambition to outgrow its main markets and to maintain or increase profitability across the portfolio.

Divisional targets 2011 – 2015

Over the near term, ABB reiterated the outlook made at the end of the third quarter. Economic and political uncertainties currently make forecasts challenging. The slower order growth seen in the company’s early-cycle businesses in the third quarter reflects the GDP slowdown seen in most regions. On that basis, the company expects early-cycle order growth to remain near third-quarter 2011 levels until macroeconomic confidence improves.

At the same time, there are also positive short-term drivers. China, India and the rest of Asia continue to grow at a fast pace. Demand also remains robust in areas such as service, medium-voltage and distribution equipment, power network management and power generation solutions, oil and gas, power electronics, robotics, and breakers and switches. Baldor, the industrial motor manufacturer ABB acquired earlier in 2011, is also performing strongly. ABB’s order backlog remains a solid buffer against a near-term slowdown, and the number and size of large projects coming to tender in the next 12 months remains near record levels, especially for high-voltage direct current and upstream oil and gas solutions.

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