Chairman and CEO letter

ABB chairman, Peter Voser, and CEO Ulrich Spiesshofer (photo)

Dear shareholders,

Digitalization is driving a fourth industrial revolution that is transforming many sectors of business more profoundly than at any time since the start of the industrial era. ABB’s customers trust us to lead this process in our core business areas of power and automation, just as we have continuously led innovation and change in these segments since our origins in the 19th century.

ABB’s strength is deeply rooted in technological innovation, and we can be found at the center of current developments in clean energy, smart grids, microgrids, robotics, industrial asset effectiveness and sustainable transport. This report provides many examples of our major contributions in these fields, along with information on our market position and strategy for the future, and, of course, our results from last year.

Big shifts in power and automation

Today, we face two key global trends in our business. One is the shift towards renewables, which is accelerating despite the low oil price – 2015 was a strong year for investment in renewables, with 121 gigawatts of capacity added. This results in unprecedented demands to manage the complexity of the “digital grid” of the future. The other is what we call the industrial “Internet of Things, Services and People”, resulting for example in growing intelligence of machines that is driving quantum leap improvements in productivity and safety in industry. As a global leader in power and automation technologies, ABB is driving this change and supporting our customers to benefit from both of these shifts. We see them as key to our business, now and in the future, and essential to solving the underlying causes of key challenges that are affecting the world today, namely climate change and weak economic growth.

In power generation, renewables are transforming the energy mix, putting pressure on traditional producers to rethink their business models while lessening environmental impact and dramatically increasing grid complexity. The future grid will be far more complex with multiple feed-in points from traditional power plants to large-scale renewables on the supply side, and a coexistence of traditional demand patterns and microgrids and nanogrids on the demand side. Managing this complexity will require intelligently automated, digital power grids that can anticipate demand and supply patterns, while routing and transporting power to the ever-increasing number of consumption points of electricity. This key part of ABB’s offering now comes from one integrated business, which focuses on “power and automation for the grid” — our newly created Power Grids division, which became effective in January 2016.

“ABB stands for groundbreaking innovations that are paving the way to the ongoing digital revolution.”

On the automation side, advances in sensor technology, combined with ubiquitous connectivity and massive increases in our ability to process and store data, are enabling machines to become more and more intelligent, as well as to learn and to interact with humans in new ways. The basis for this is the industrial Internet of Things, Services and People. In time, this will enable the next stage of industrial automation, in which machines and entire process chains learn to reason and take decisions, making processes self-regulating and self-optimizing.

Pioneering technology leader

ABB stands for groundbreaking innovations that are paving the way to the ongoing digital revolution. These technologies address the needs of our customers and the major shifts in the fields of power and automation.

ABB’s innovations for the grid in 2015 included devices that can automatically adjust the voltage fluctuation across entire distribution networks. These address the major challenges to stability posed by the expanding role of renewable energy in the system. We also achieved again more world firsts in high-voltage direct current (HVDC) transmission, a technology pioneered and developed by ABB. These included the world’s first multi-terminal ultra-HVDC link, activated in India, and the successful deployment of a new blackout recovery system in Finland.

In 2015, we took many steps to turn our digital vision into reality. Our state-of-the-art dual-arm collaborative robot YuMi was launched to great acclaim at the Hanover Fair. This product demonstrates ABB’s technology leadership in hardware, software and services. It is extremely accurate, able to learn, and is connected to our global remote condition monitoring center in India. Strengthening our leadership in automated buildings, our voice-controlled smart home system ABB-free@home significantly exceeded expectations with very strong growth. An order from Maersk Line for software for 140 container ships demonstrated our innovative capacity in this sector. Based on hull design, loads, weather and wave motion monitoring, the software optimizes each vessel’s route to enhance safety, speed and energy efficiency.

“The divisional realignment, and our measures to improve productivity, will drive organic growth and make us leaner, faster and more agile.”

Next Level strategy

Staying at the forefront of the big shifts in power and automation requires technology leadership as well as an effective organization. In 2014, we introduced the Next Level strategy covering the 2015-2020 period to drive profitable growth and accelerate sustainable value creation in a fast-changing world. In 2015, we made significant progress toward many of our goals, reinforcing our focus on innovation, streamlining our organization and strengthening our performance culture. Our customers have noticed the improvement; their satisfaction, as measured by our Net Promoter Score, increased by four points in 2015 to 48. A major execution achievement was the successful turnaround of our Power Systems division, which entered its target margin corridor in the fourth quarter of last year.

In September 2015, we launched Stage 2 of the Next Level strategy to accelerate the transformation of ABB. Building on our three focus areas of profitable growth, relentless execution and business-led collaboration, we are continuing to drive the shift in our center of gravity toward higher growth, greater competitiveness and lower risk, while accelerating existing growth and execution improvement programs.

A key action of Stage 2 included the customer-oriented streamlining of our divisions from five to four, which was implemented in January 2016. The new Power Grids division – comprising parts of the former Power Products and Power Systems divisions – is a world leader in power and automation technologies for the grid, enabling the transmission and distribution of electricity. As such, it is an ideal partner to help utilities meet the new challenge of building a digital grid to manage network complexity and integrate renewable energies.

The newly created Electrification Products (EP) division is one of three focused on power and automation for the site of electricity consumption, which includes industry and transport and infrastructure. This new market-focused division brings together our strong portfolio of medium- and low-voltage solutions. Together with the Discrete Automation and Motion and Process Automation divisions, EP is well positioned to shape the new industrial era we are entering.

The divisional realignment, and our measures to improve productivity, will drive organic growth and make us leaner, faster and more agile to deliver our targets, close the gap in operating performance with our best-in-class peers, and unlock further value within ABB.

Looking back on what we have achieved …

We are building on strong foundations and on the results of the homework we have done. In 2015, ABB delivered solid results in a challenging environment. In a year of weakening markets and uncertainty, we delivered steady orders and revenues on a comparable basis. The successful rollout of our framework of penetration, innovation and expansion (or “PIE”) across our markets and customer segments allowed us to realize profitable growth in many areas, mitigating some strong market headwinds. Our profitability, measured in operational EBITA margin, was up 60 basis points on the year to 11.8 percent.

Nevertheless, our far reaching restructuring measures – particularly in businesses impacted by the slump in commodity prices and our white collar productivity program – played a significant role in dampening net income for the year, which was just over $1.9 billion, down 25 percent from 2014. Significant changes in foreign currency rates continued to impact our financial figures reported in US dollars. In addition, one of the challenges we are addressing is the decline in revenues and margins in our Discrete Automation and Motion division. The division suffered from weakening demand in process industries in key markets such as the US and China for products and services.

Faced with these significant headwinds, our decisive action on productivity, costs, working capital and organizational streamlining allowed us to increase our Group operational margin for the year while maintaining strong levels of cash flows.

Our solid financial performance is a good basis to maintain our commitment to delivering attractive returns to our shareholders. Last year we returned more than $3.2 billion in cash through dividend payments and share repurchases. The Board of Directors is proposing a seventh consecutive dividend increase, to CHF 0.74 a share, at the 2016 annual general meeting.

… and looking ahead to new challenges and opportunities

Our markets remain challenging, with slower growth in China and steady conditions in Europe and the United States. We expect India to invest in power infrastructure and industrial development, but see continuing weakness in other emerging markets. In this environment, we will continue to focus on our opportunities for profitable growth, on mitigating the impact of sluggish markets by our relentless execution of productivity measures, cost reductions and cash actions, and on business-led collaboration designed to provide outstanding service to our customers.

“We are building on strong foundations and on the results of the homework we have done. In 2015, ABB delivered solid results in a challenging environment.”

The longer-term prospects for our business remain excellent; the digital revolution continues to unfold at high speed, and it is poised to yield significant improvements in productivity and business activity in the medium term. As the fourth industrial revolution gathers pace, we have laid the foundation to take ABB to the next level. We made solid progress towards our targets and remain highly focused on our goal to make ABB leaner, faster and more externally focused. ABB will continue to drive major shifts in power and automation.

We are proud to have such a dedicated and hard-working team at ABB, and we thank our employees, customers and partners around the world for their vital support. We would also like to extend our warm thank you to you – our shareholders – for your continued trust. ABB is a pioneering technology leader with strong positions in attractive markets, and we remain committed to delivering attractive returns to our shareholders, based on our clear transformation agenda.

Sincerely,

Signature of Peter Voser, Chairman (handwriting)

Peter Voser
Chairman

February 25, 2016

Signature of Ulrich Spiesshofer, CEO (handwriting)

Ulrich Spiesshofer
CEO