Chairman and CEO letter – Annual Report 2017 Dear Shareholders, Customers, Partners and Employees,

Dear Shareholders, Customers, Partners and Employees,

Peter Voser, Chairman of the Board and Ulrich Spiesshofer, Chief Executive Officer (photo)

Peter Voser
Chairman of the Board of Directors

Ulrich Spiesshofer
Chief Executive Officer

2017 was a transitional year for the world, characterized by an increasing sense of optimism and confidence in the prospects for the global economy even as parts continued to experience some uncertainties. For the first time since the financial crisis of 2008, growth exceeded expectations, and we saw tangible progress in many important emerging sectors. On the energy side, new installations of renewables (solar, wind, etc.) again reached record levels and e-mobility took center stage, with several governments pledging to phase out fossil fuel-powered cars within the next few decades. The oil price stabilized at a higher level and the process industries showed signs of bottoming out, providing further signals for recovery. The impact of digitalization in industry became more evident and we saw businesses ramping up investments in digital solutions. In several countries, most notably China, France and the United States, governments set in motion important changes and reforms focused on the long-term future.

For ABB, 2017 was a transition year. We streamlined and strengthened ABB in 2017, in accordance with our Next Level strategy, further executing on the plan that began in 2014. Now, we have four market-leading divisions. Combining their traditional offering with our ABB Ability™ digital solutions, we have an innovative and truly digital portfolio for customers in utilities, industry and transport & infrastructure that is based on two clear value propositions:

  • Bringing electricity from any power plant to any plug; and
  • Automating industries from natural resources to finished products.

We drove ABB’s transition as the energy system is being transformed by the massive ramp-up of renewables on the supply side of electricity. On the demand side, e-mobility as well as data centers are changing the usage pattern of energy and electricity. At the same time, industry is automating and driving advances in competitiveness at an accelerating pace, thanks to digital solutions, robotics and, increasingly, artificial intelligence. These developments, often termed the Energy Revolution and the Fourth Industrial Revolution, hold out the prospect of a sustainable energy future as well as major leaps in productivity for all industries.

ABB has consciously and strategically transformed itself to profit from these revolutions. Today, our four divisions are either #1 or #2 globally in their respective markets. Our customers choose us to build stronger, smarter and greener grids; to provide electrification for all points of electrical consumption; to help industries achieve perfection in automation; and to harness robotics and intelligent motion solutions for better productivity.

One of the world’s biggest challenges is to decouple economic growth from its environmental impact. To achieve the Paris Agreement target of limiting the rise in global temperatures to fewer than 2 degrees Celsius, the world will need to turn even faster to renewables and e-mobility, as well as dramatically improve energy efficiency. As a global technology leader, ABB is uniquely positioned to help. We have been supporting countries in their efforts to build the necessary infrastructure to move towards a sustainable energy future, and helping industry and cities reduce energy usage.

Formula-E (3d-render)

E-mobility

Our sustainable mobility solutions are winning orders from around the world as the shift to e-mobility picks up speed. ABB today offers globally the entire bandwidth of technologies to enable sustainable transport – from the integration and transport of renewable energy to the fast charging of cars in a truly unique way. Since ABB entered the electric-vehicle charging market back in 2010, we have installed more than 6,500 fast-charging stations in 57 countries, making us the world leader in EV fast-charging. With ABB Ability, our fast-charging stations are connected via a cloud-computing platform, enabling integrated vehicle and fleet data management and cashless payments, among other things.

For urban public transport, our high-power charging solutions for electric and hybrid-electric buses have been well received, winning several orders from Volvo buses for Europe and North America. In 2017, our innovative flash-charging technology, which recharges buses in 20-second bursts at stops, while passengers are embarking and disembarking, went into operation in Geneva, and was chosen for a new bus line in the French city of Nantes.

The Fourth Industrial Revolution

Alongside the energy system, industry is being transformed by rapid technological advances, such as sensors and technologies like machine learning and artificial intelligence, which are now complementing human brain power, as opposed to simply replacing human muscle. To help drive the Fourth Industrial Revolution, we launched in 2017 ABB Ability™, our innovative solutions-based digital offering with more than 210 solutions, based on ABB’s comprehensive portfolio, our more than 40 years of experience in industrial software and our domain expertise. ABB Ability is central to our strategy of driving growth through the expansion of high value-add solutions and services. It has been well received by our customers around the world. Among the larger players using our ABB Ability solutions are Shell Oil, CenterPoint Energy, Con Edison, BASF, Royal Caribbean, Cargill, Volvo and BMW.

The Fourth Industrial Revolution is delivering significant improvements in industrial productivity. Over decades, technology has helped lift millions of people into the middle class. Since 1990, the proportion of the world’s population living in extreme poverty has declined from one third to less than 10 percent today. At the same time, however, the pace of technological change and increasing automation is leading to fears of widespread job losses and mass unemployment. As a pioneering technology leader that is playing an active role in the Fourth Industrial Revolution, ABB recognizes this concern and is helping both its customers and its own workforce to adapt. With our automation, robotics and ABB Ability digital solutions, we are shaping companies’ and countries’ competitiveness and creating prosperity and employment. In 2017, we were again recognized as the market and technology leader in distributed control systems – the brains of process plants and large-scale industrial operations. In the future, there is every reason to believe that the Fourth Industrial Revolution – like its predecessors – will create new industries and, over time, many more jobs to replace those that do disappear.

Delivering on our Next Level strategy

In 2017, our transition year, we delivered four consecutive quarters of rising base-order growth (comparable), and positioned ABB for profitable growth as global markets are improving. Today, with our Power Grids and Electrification Products divisions, we hold the #1 position from “power plant to plug.” Taken together, our Industrial Automation and Robotics and Motion businesses put us in a strong #2 position for automation as the only global industrial player that combines measurement and analytics, control solutions for both process and discrete industries, actuation, robotics, digital solutions and electrification.

ABB Ability is central to our strategy of driving growth through the expansion of high value-add solutions and services.

In 2017, we made significant progress in shifting ABB’s center of gravity towards stronger competitiveness, higher-growth segments and an improved risk profile for our business. Our acquisition of B&R (Bernecker + Rainer Industrie-Elektronik GmbH), the largest independent provider of machine and factory automation solutions, closed a historic gap in our automation portfolio, giving ABB the most comprehensive industrial automation offering in the industry, and opening up significant growth opportunities in the $20 billion machine and factory automation market.

During the year, we made a number of investments in innovative companies to strengthen our automation and software capabilities, acquiring the communications network business of KEYMILE to strengthen our grid automation capabilities, and Spanish start-up NUB3D, a leading innovator of 3D measurement, inspection and quality-control solutions, to strengthen our digital portfolio.

In September, we signed the contract to acquire GE Industrial Solutions, GE’s electrification solutions business, which will strengthen our global #2 position in electrification and significantly expand our access to the North American market.

We are strategically addressing attractive, fast-growing segments like food and beverage and microgrids as well as focusing on geographical markets such as Africa. In this way, we are driving incremental growth momentum and developing new long-term opportunities for the future.

ABB robotics (photo)

Finally, we are de-risking ABB and completed the change of our business model for engineering, procurement and construction (EPC). This is being achieved through joint ventures with EPC partners as well as by winding down the turnkey full train retrofit business in our Robotics and Motion division. Continuing our active portfolio management, we are divesting businesses that are no longer core to our portfolio, like we did with the high-voltage cables business in 2017.

In 2017, we continued to further streamline and strengthen our operations in line with our ambition of achieving world-class operational excellence. Our 1,000 day white collar productivity program exceeded its increased targets of reaching an annual savings rate of more than $1.3 billion by the end of 2017. Over the same period, we reduced working capital significantly and freed up $1.5 billion in cash.

For ABB, 2017 was a transition year. We streamlined and strengthened ABB in 2017, in accordance with our Next Level strategy, further executing on the plan that began in 2014.

Following the unfortunate embezzlement scheme that was exposed in our South Korean subsidiary in February 2017, the company took swift and decisive actions. We identified the relevant control issues and remediated the material weakness in our internal controls and replaced the management team in South Korea.

To drive a stronger performance orientation in line with the Next Level strategy, we have transformed our performance and compensation model to focus on individual accountability and responsibility. Today, our compensation system is closely linked with strategy and individual performance. The long-term incentive program for executives is now wholly linked to shareholder returns. More details are described in the compensation section of this report.

Financial highlights of 2017

The 2017 annual results include the dampening effect of some still-muted market segments as well as of our massive transformation. We have streamlined and strengthened ABB significantly and delivered four consecutive quarters of increasing base-order growth.

Key figures

  • Total orders were steady with base orders up 5 percent (comparable) and 6 percent in US dollars.
  • Revenues were up 1 percent to $34.3 billion.
  • Operational EBITA margin was 12.1 percent, impacted 30 basis points due to charges related to the EPC businesses. These EPC charges were recorded in Q4.
  • Operational earnings per share was 1 percent lower in constant currency terms.
  • Cash flow from operating activities was steady compared with 2016 at $3,799 million.

Looking ahead

Going forward, we have a solid foundation in place and with our streamlined and strengthened portfolio are well positioned in attractive markets. The Board of Directors’ proposal to increase the dividend for the ninth consecutive year demonstrates our confidence in the future.

For our achievements in 2017, our transition year, we would like to thank all of our stakeholders: shareholders, customers, partners and our employees all around the world. ABB’s success is made possible by the trust that you, our shareholders and customers, place in our company and our technologies, and because of the fruitful collaboration we have with our partners. Our brand promise, “Let’s write the future. Together.” demonstrates our belief that we are all working together for a better tomorrow.

We would like extend a special thank you to all our loyal and talented employees for their tremendous contribution. They regularly went the extra mile in 2017 to deliver on our commitments and to ensure that our customers are satisfied in a year of substantial transformation.

Our focus in 2018 is now firmly on relentless execution with the new streamlined and strengthened ABB. With the most focused and clearly articulated portfolio of our industry, we are better positioned for profitable growth in better global markets.

Signature of Peter Voser, Chairman of the Board of Directors (handwriting)

Peter Voser
Chairman of the board of Directors

Signature of Ulrich Spiesshofer, Chief Executive Officer (handwriting)

Ulrich Spiesshofer
Chief Executive Officer

February 22, 2018