ABB Ltd (NYSE:ABB)
Q4 2013 Earnings Conference Call
February 13, 2014 8:00 ET
Ulrich Spiesshofer - Chief Executive Officer
Eric Elzvik - Chief Financial Officer
Tarak Mehta - Head of Low Voltage Products Division
Greg Scheu - Head of Business Integration and North America
Veli-Matti Reinikkala - Head of Process Automation division
Andreas Willi - JPMorgan
Michael Hagmann - HSBC
Andrew Carter - Royal Bank of Canada
Martin Wilkie - Deutsche Bank
Simon Toennessen - Credit Suisse
James Moore - Redburn Partners
Nick van Rensburg - Blackstar Global Opportunities Fund
Olivier Esnou - Exane
Sebastien Gruter - Societe Generale
Hampus Engellau - Handelsbanken
Daniela Costa - Goldman Sachs
Will Mackie - Berenberg
James Stettler - Barclays
Unidentified Company Speaker
Good afternoon, everyone. I would like to thank everyone today for taking the time to make the journey to Zurich as well as the ones who are joining us over the webcast. I would like to welcome you today to ABB's Full Year and Quarterly Results.
Today's event will start with presentations from our CEO, Ulrich Spiesshofer and our CFO, Eric Elzvik. This will then be followed by presentations from two of our Executive Committee Members, Tarak Mehta, who is the Head of Low Voltage Products as well as Greg Scheu, Head of North America and is also responsible for Business Integration and Global Service.
After this we will end with Q&A. For those of you, who are participating via the webcast, please follow the instructions to line up in the queue for questions.
With that let me draw your attention to our Safe Harbor statement on Chart 2, for any forward-looking statements we might make during the day.
With that, I would like to hand it over to Ulrich Spiesshofer, our CEO.
Thank you very much Yelena [ph]. Good afternoon ladies and gentlemen on behalf of the entire Executive Committee of ABB, I would like to welcome you to our annual results conference here. We look forward to share this afternoon with you our strong results that we have delivered in quite challenging times.
We have split the afternoon in an agenda maybe on the one-hand give you an update maybe came out in 2013 in terms of the full-year results and on the quarter, Erik and I will be sharing this presentation. Then we will update you on our expectations against the outlook and the targets of ABB that we have given our results. And you might remember in fall, when I set out as the new CEO, we defined three focus areas, profitable growth, business led collaboration and relentless execution. And today we want to give you and update, what it really means for daily activities, how we are driving ABB now in this three focused areas and how we will deliver on value creation.
So if you think ABB in 2013, some of the parts of ABB has delivered, one more time. The revenue are up. We are at a all-time high in terms of revenue posted $42 billion in the Group. The early cycle business have started to come back, the long cycle business is still slow based on the reluctance buying behavior of our customers on the infrastructure and on the larger project side mainly in the process industries.
Four of the five divisions performed really well. And I'm very happy that all division head are here today, if you have later on one or the other question, they might also come in and share their perspective on it.
The operational EBIT is up by 9%, ahead of revenue growth, which is the sign for very strong execution this year again despite the difficult market environment. The integration of our large acquisitions is on track and we give you today a little bit more flavor where we are staying on that one, this is something that we have allocated a lot of capital in the last couple of years and I think its important to share with you where we are in terms of the integration how we are going about it.
The service part of ABB is an important one. The service orders are up especially in the last quarter of the year very encouraging signals and you see on the business led collaboration side, really good results for entries collaboration on the account market side, we will share more details on that one. We would not be with the margin where we are today, if we wouldn't have established our relentless focus on cost reduction.
In 2013, we are yet again taking $1.2 billion of cost out which is an important pattern of ABB, this is not a one-off program, this is part of our D&A today and again, we will share with more results with you during this afternoon.
The automation side of the business, if you take it together has delivered a higher margin, which just proves that in difficult times good execution was done. Power products leads continuously to set the profitability in the relevant sector, which is something Bernhard and his team have now done for many years consecutively and it's a very strong part of the ABB portfolio.
And in Power Systems, you were all around when we came out a couple of weeks ago with the bad news that we had there. We got clear actions in operation. The action program is being implemented as we speak, Mr. Claudio Facchin, who is here in the audience today, the new leader. He has established. He is working already very well with the team. And we are making good progress on implementing intersections.
Free cash flow, a very important health indicator of any enterprise is at 94% in terms of the conversion a very strong signal that ABB is in good health and execution is in order. All this results together maybe talked and through with the Board earlier this week, we suggested that the Board and the Board purposes now to the AGM, the fifth consecutive dividend interest in line with our dividend policy of sustainably rising dividend over the time. We are suggesting a dividend of $0.70 or up in the share which is now a nice steady development.
So let's say in a nutshell, the ABB result for the year, let me draw you now to a little bit more through the details.
ABB, our vision is power and productivity for better built. And a lot of people say this marketing or what is it really? We get more and more business on sustainable energy a significant part of our business portfolio is already there today. And we get externally more recognized. Couple of weeks ago, we received the Zayed award, which is basically the award of the ruler of the Emirates for sustainable energy companies. We won that and received as a recognition of our very strong track record and our very strong execution on the sustainable energy side.
Now, if you go around the world, what ABB has been in 2013, it's a mixed picture. If you go through the different parts of the portfolio, if you go through the different regions of the world our automation trended definitely higher than the power side of the business, and if you take Asia for example, China being up altogether about 7%, automation in Asia being up 7%, that shows there is no growth out there and we work relentlessly to realize it.
In the Americas, we are up on the automation side that's about 4 points, we are significantly down on the power side, which just shows the hesitance in investments in large infrastructure that we have observed now for quite a couple of quarters.
Europe, we have a mixed picture some countries down, the largest economy Germany up, it's 7% for us, which is a really good result in that part of the world. And Middle East, Africa, the overall year is down, but if you look at Saudi, for example that is down, the Emirates up 30% and especially in the fourth quarter we had some good momentum coming, so I'm quite optimistic about that part of the world going forward.
If you look out at our business portfolio, I could probably spend the next three days talking about all the achievements, we have summarized here a couple of different divisions.
Let me start with Power Systems. Power Systems we had to sit back in the fourth quarter that we reported to you and that something that we don't like. But, what we like is the underwriting quality of the business. We had some really good project success, the connection between Ireland and Wales, which is the largest capacity HVDC connection that was ever built on the subsea side. The project offshoring project that we did in Belgium where we installed an offshore platform on time, on budget and the customers really, really happy. Just shows that in that business we got great people, we got a good team and there is a lot of good project out there.
We have established with Claudio the new leadership and we have strengthened further the HVDC positioning of ABB. Power products leading the sector in terms of profitability, strong cash, strong results and very good momentum on the service side which helps us to improve steadily the quality of the business over time, process automation and Veli-Matti's leadership at the all-time high in terms of profitability, really well done in a difficult market environment a lot of service activities, they are also compensating for less large orders. I think that's a good one. In Tarak's business on Low Voltage, couple of good acquisitions, Thomas & Betts being the largest one integration well on the way, we are really happy about it. But also good investment in new technology the Emax breaker that we have – breaker and itself that also drives energy efficiency a great product.
And then on the DM side, Discrete Automation and motion under Pekka's leadership great work on the robotic side, continuous ramp-up of the robotics, rollout into general industries and good momentum coming from Power-One, which is our newest acquisition putting us on the number two position in solar inverters in the most attractive part of the solar value chain.
So the numbers for the divisions speak for themselves, all divisions profit is up. All divisions revenue is up that basically means we have the house in order regarding execution and on the PS side, the few projects where we had an issue, we have contained, we are working on it that really get that also to the quality that we want it to be.
The order side of the business shows the world as it is today. The more you are in the direction of OpEx repeatable purchases the better for the portfolio has done, the more you go towards large CapEx, large project, large infrastructure and expense, the lower the order intake is in ABB. We came out 2013 with $3 billion less backlog than we had previously, which is something that you will see later on will flow into the revenue in 2014.
If you talk a little bit more about the PS situation, we said what it is, we explained it to you, here are the actions that we are taking. Basically the actions are in two buckets. On the one hand, fixing the project issues, there we have ramped up the team quality, we have invested in more technical and functional expertise, we really learn in the offshore wind field which is basically a start-up technology that we got into a couple of years ago. We are getting better rated. And if you look at the Belgium example, I think we have some platforms which are going well. But overall, this is still a pretty new technology that will be still moving up the S curve in terms of experience. This is a pretty expensive learning, but its also very important technology.
We work relentlessly to drive the quality of the portfolio both overall and then on the order side, the right commercial discipline, the risk-mitigation is absolutely key. Our pricing models need to reflect the intrinsic risk of the business to make sure we are rightly positioned for more commercial situation and also on the commercial term side.
Power Systems is a good business. And it's a good opportunity out, they are long-term for ABB. So we need to invest, we need to get it in the right shape. And we need to continue the reset, and I'm very confident that under Claudio's leadership this will continue in a really good way.
Service I already talked earlier about, service is a key part, it helps us to stay in touch with the customer over the lifecycle of the use of our product, it helps us to drive additional value for the customer. It is achieving a certain balance to our portfolio over the cycle. And it is a profitable business that we really like. So we have invested strongly and today Greg Scheu, who is on the Executive Committee and responsible for North America, integration of our acquisitions and service, will give you an update on where we stand in realizing the momentum and getting the results out of our service strategy.
I'm quite optimistic that we will continue the path that we have started in terms of ramping up the service share in our portfolio basically growing service ahead of the overall portfolio.
Hallmark of ABB is execution. And in 2013, we yet again took out a $1.2 billion in terms of cost. Now, how do we do that? First, everybody contributed. You see on the left side in front of you, you see the divisional split, every division is taking out significant cost and that has contributed to the cost cut.
If you look at the key levers, the levers are not mainly head count, the levers are really around operational excellence, enterprise optimization, we have more than 5000 projects in operational excellence running. Now, you might say this is a lot. Now we are active in 100 countries. We have many 100 factories. We have a lot of process update we can work on. We have applied Lean Six Sigma, not only on the manufacturing shop floor but also more and more in the processes on the overhead side which yields really good results.
We have done a lot of home work in design to cost, which is very important understanding what is the cost base that we can allow and design towards that is a key element of target costing approach in product design and also the design for reliability. The more reliability we have in the product, the better is for the customers and us because then that means the customer has less cost to operate and we have less R&D cost on the product which can be a key differentiator.
On the sourcing side, the Besco [ph] stores that we have established over many years now is still yielding good results. We enter now more and more joint sales and operations planning maybe jointly with the suppliers optimize the whole value chain, the parameters around the inventory levels, the cost to serve, logistics stream and if you get better then we can take cost out of both sides, which is beneficial of both partners in the supply chain area.
A key area that we focused stronger on now is the indirect area, transport and logistics, overhead cost, there is a lot of third-party spending there and by pooling, by working better together, by making shoe for example, the demand pattern of shipment is better coordinated in key countries where ABB has an operation. We can take significant cost out and that's an opportunity that will be with us for the years to come.
The integration of our two largest acquisition, we have picked the two largest Thomas & Betts and Baldor is well under way. Let me first talk about Thomas & Betts, both Tarak and his team together also with Greg was deeply involved on integration of Thomas & Betts but they have created is remarkable in very difficult times out there. The cost savings are ahead of plan and I'm very happy about that one. And the Thomas & Betts leadership is so strong that they also took over the responsibility for the over all LP portfolio in North America, it's a strong signal to them and it's a strong signal to us also.
On the Baldor side, time is up, the three years are over that we committed to get after three years time, we said we want to have a zero target above our work. We have achieved it and I'm really, really happy to share that with you, that's the key measure of the integration quality that we are delivering and we have exceeded even the target we have given ourselves.
We invested a lot in the quality of the business of Baldor to take it even to another level throughout automation and the global rollout of the Baldor variable proposition of the products that they have we have executed relentlessly on.
What we have also done is, we streamline the Baldor portfolio. This Baldor came with genset business, the genset business is strongly build around combustion engine technology, ABB doesn't have combustion engine technology and skill. So we decided to divest this business in a regular portfolio pruning approach and this is something that will be for us in the years to come that we regularly look what do we add to the portfolio but also how do we develop the portfolio by taking out what is not appropriate in our overall business portfolio.
We have not only integrated in 2013, we also went shopping and expanded our portfolio with some targeted acquisitions. Power-One, you all know Power-One integration is well underway. The customers really appreciate the product. I recently was in the Middle East meeting some customers and a special cooling technology for example that we have on the Power-One large solar inverters is a key differentiator for example in very dusty environment, heavy encapsulated cooling there differentiates us from some of the competitors. And I think we got really great product there that we now roll out.
Newron is a smaller acquisition in building automation software which really helps us to bring the different building blocks on building automation together. ELBI Elektrik and its low voltage products in Turkey, Los Gatos is a measurement device acquisition in North America and Dynamotive was a smaller service acquisition for motors and drive in the U.K. So all together we have continuously worked on expanding the portfolio, adding good companies, all these companies are good companies and we are happy to have them in the Board. The integration is well underway and Greg will later on talk a little bit more how we go about this integrations.
So if you take three steps back, ABB has really strengthened competitive position and what are the pillars of this strengthening. A) On the innovation side throughout the cycle we have invested every more on the R&D side. We have a tremendous amount of wonderful new products coming out of the pipeline and at the time when some others might not have newest technology because they cut R&D through the crisis, we are there with new products and the customers really appreciate it.
One example the new GIS range in Bernhard's business on the different voltage level really differentiates us and has a very good response on the customer side.
Talking about the customer, our NPS is up, customer satisfaction surveys show us a 36% which is about 35% to 6% increase compared to the previous year and we continue to use net promoter score as a compass to really say okay, where should be focus the business opportunity -- business improvement opportunities. Our industry sector initiatives, we have changed the leadership there and leadership responsibility there by putting each of the division head, Executive Committee Members running the divisions in charge of one of the industry sector initiatives to really force the more collaboration across ABB and make accountable visible on the most senior level of ABB for collaboration.
People are the real core of ABB and we are working very strongly to improve our people value proposition, which has also been recognized externally. I don't know whether you saw it in the last couple of weeks, we got recognized in Germany, which is a market where we are strong in our presence, we got recognized as the Top Employer, the number one employer in our sector by one of the most important German magazines and we are particularly proud about having that it is very important market.
We have moved to expand our geographic scope Sub-Sahara Africa being one, another one being the MINT countries especially Mexico, Indonesia, Nigeria and Turkey that are really ramping up. In Mexico, we build a couple of years a joint plant across the divisions we are getting good results out of it. Indonesia is a focused market that we invest heavily in on the service side on the sales side and on Nigeria we have some larger projects that we have conducted there. Turkey is a country that we have been very happy with good momentum, good investment and also with the local footprint that we have invested in.
All together we had a pretty smooth leadership transition you see many new faces here in this room today on the Executive Committee of ABB. The teams has worked together wonderful and I can just tell you from my own experience ramping up in the new roll, the team supported it in a fantastic way and I'm extremely grateful for that.
So if we summarize where is ABB today. It's a resilient shareholder returns providing company that is much better balanced than in the past that has even better execution and provides very strong even better results that in the past for the shareholders.
With that opening I would like to hand over to Eric, who will share with you the Q4 results.
Thank you, Ulrich. So good afternoon, everyone. And lets now look a little bit more in detail on what we did in the fourth quarter. So if you start on the growth side we had a continued good development on our base orders they grow 4% in the quarter same number as the third quarter so we are on a better growth trend than in the earlier quarters for the all the orders with values less than $50 million. Also behind that the early cycle business in low voltage product in discrete automation and also in the power division sits on the good trend also growing single digits.
The execution of revenues was good, profitability is up in all divisions and on the large order side as Ulrich already talked about. We still see challenges in terms of delay o the launch of larger orders. What is very positive is the service business you have heard from us over many quarters that we are focusing more on service the growth in service in the quarter itself was 15% and on the revenue side up 4%.
Cost savings is not only good for the full year as Ulrich wanting quite some detail, but all during the quarter we have a steady flow of cost savings. We recorded some $350 million cost savings in the quarter itself. On the execution side cash flow for the year ended up well, I will come back to that in a little bit later with more details but overall on the cost saving we had a 4.2% saving in the quarter.
Turning to the regional development in the quarter itself, if you start in Europe we were down 9% mainly due to less orders in the power area. We know that the purchasing decisions have been partly delayed in that area but automation was balanced which is again fairly similar picture to the earlier quarters. Also in the countries in Europe you can see we have a mix of positives and negatives and I would like to point out Italy which is in from a low level now stable and growing again.
Looking at Asia and Middle East, so they are both positive up 5% respectively 9% and with better numbers in automation in Asia than power. And you see there some of the smaller countries are back to growth, obviously from lower comparables at the end of 2012, than it was in the earlier part of 2012, but we are still back to growth and that is very important. China was negative in the quarter, it is very important to see that for the full year China is up by 7%. The reason we are down is one or two larger orders booked in 2012, but across the board in most of the areas in China we are pleased with the development also in the fourth quarter.
Middle East booked a couple of larger orders in United Arab Emirates as well as in Kuwait. And then on the American side we have minus 10 partly pull down with Brazil, Brazil continues to be a challenging market for us. But looking in the U.S., which is also minus 5 behind that number we actually have a positive development in the automation business in the U.S. So there are clear sign of positive development there from a automation portfolio point of view.
Looking down further into the details on the divisions, on the order side behind the minus 4, we had in the quarter on overall orders, we had good development in DM, with a positive 10% that includes the effect of Power-One but even if we back that out we have a positive development with a good growth in the discrete automation portfolio. Revenues across the board is positive 4% and you can see all the divisions continue to be up, operational EBITDA as well is up in all the division. And on the margin side we had up for the group and up for four of the divisions and in discrete it is slightly down again this can be referred to Power-One, which has the lower margin on the average of the DM division at present.
What I think is important to point out is the good in case we had in process automation, very good execution of projects there, we are up 1.5% in the process automation division. And obviously in Power Systems we had a negative result as you have heard in the announcement two weeks ago but it is still somewhat higher than last year obviously we had also a large short-term we'll come back to that shortly.
If you then walk the bridge, this is the comparison of the profitability in Q4 2012 compared to the same quarter in 2013 same way as we have done in the earlier quarters. What we see as very positive is that the cost savings I referred to before of $350 million outpaced price pressure. So we had a positive $67 million from that in the quarter. Volume effects continue to be positive remember the revenues are up by 4% and out of that we have a positive effect on volumes and also the effect of very strict cost management both on G&A and general structure cost but also a careful spending on R&D and sales in the quarter itself.
Mixed effects are basically balanced, this is up and down a bit between the quarters but in the fourth quarter essentially balanced and on the Power System side its minus 13 but behind that you have to see that there is a $247 million charge in 2012 and $260 million charge 2013. So the Power Systems shortage in both quarters have a major impact on the module number of 12.5 in the quarter. So all in all, we ended the quarter with exactly the same as in last year 12.5%.
There are a lot of questions around foreign exchange impacts on ABB, I'm very glad to report that on the total Group, we have very minimal translation effects, its actually 1% minus globally. Despite quite some deteriorations on the valuations of the emerging market currencies, which we have seen also during this year continuing, so we can see very big numbers minus in Russia, in Brazil, South Africa and Turkey as examples. But the way ABB is spread around with its global footprint this is balanced out by a small positive appreciation in China against the dollar. China is very heavy in the calculation obviously because its our second biggest market globally and also the European currencies both euro and Swiss franc and Swedish krona goes in the positive direction. And the fact of course that we also report in U.S. dollars, the U.S. dollar is itself is a major chunk of the equation makes the net effect very small on ABB.
And if you roll this forward into 2014, we expect the similar pattern for the coming quarters this will not change that much unless we have some massive swings in the currencies. This is only the translation effect, important is also of course our global footprint and the hedging itself. With factories and the activities we have in China, in India and in many other all those countries we still keep a good competitive position in most of those markets and there are very few markets where we have headwinds because of the currency we have more input. So ABB's global reach helps us very much in this respect.
Turning to cash flow, we had good development on divisional cash flow in the quarter it ended up with exact the same number in million of dollars despite that Power Systems in the fourth quarter were about 200 million lower than 2012. So the divisions overall have done a good job on the cash flow side overall for the year, we are $150 million higher and you may remember that in 2012, we had a very big cash inflow in the fourth quarter. So in 2013 we have begun the journey to flatten out the cash flow between the quarters somewhat more than before and that will continue with a lot of efforts in this year and going forward, so showing more balanced cash flow. Part of the cash comes from networking capital.
We came down to 15% networking capital percent of revenues, so its at the lower end of the 15% to 16%, we have guided to. It is still not the number which you are happy with. We want to get back into our long-term guidance of 11 to 14. And rather into lower end of that obviously long-term, so we have a lot of programs going on now down into the detail of the operations, to change the operational pattern mainly on the inventory side. But also on the project execution side to improve further the networking capital percentage in the quarters to come.
You will also ask yourself on the corporate side, why we have a big positive in 2012 and a negative this year. The main reason for that is that in 2012, we also had some derivative accounting effect in the cash flow and this was the last from that accounting practice that we had at that time, we created a positive effect in 2012. So the swing is, start-up effect is now gone and we are back to a more normal situation where we will have negative cash flow on the corporate side in most of the quarters.
Looking at the development and the positions we have between the operational EBITDA and the net income, there were quite a lot of questions on the conference call two weeks ago. So we decided to put the short into show what – which are the key items we have between operationally EBITDA and net income on the Group as a whole. A lot of these items has obviously the depreciation, amortization, which is only a normal depreciation and amortization from the business and also the amortization from the acquisitions we have done. So about $100 million out of the $350 million comes from amortization of acquisitions.
Restructuring was $150 million in the quarter that includes the $50 million of additional restructuring we have taken for the Power Systems, which we communicated in the call some weeks ago. On the acquisition costs and non-operational items, we have the regular things that comes through the acquisitions, but in this quarter we had fairly big numbers from the first accounting effects from Power-One, which is one-time that will go away. We also sold some old assets, an airport in South Africa for instance, which we had on the portfolio for a long time and we succeeded to get out of it, but its cost us some charges on the corporate side.
And also on discontinued operations, we had to take a few charges for some old divested entities that we have. So all in all, this is the picture between operational EBITDA and net income.
On the EPS side, we ended the year with 3% up in earnings per share, obviously negatively impacted by the charges we took and if we look at the operational EPS, which we have reported since the couple of quarters that's a 4% up for the year as well.
Turning into the balance sheet and strength of the financial position of ABB. We have an excellent position to continue our growth along the lines we have communicated earlier. We produced $2.6 billion free cash flow this year in line with 2012 and you can see over many years we have been on a relatively good level.
On the debt side, and cash we have at the end of the year some $6.5 billion of cash resources available. We kept the net debt on the negative $1.5 billion roughly and this is also obviously paying the dividend and also making the M&A investments where Power-One was the biggest ticket with about $1 billion. This is the leverage we should have, we have some leverage but it is basically fairly well-balanced.
On the maturity profile on the $8 billion of long-term debt we have, its quite attractive profile with a long maturity. We made a lot of effort in 2012 to take advantage of the low interest levels so the interest cost on this portfolio is very attractive. And finally, the equity has continued up in 2013, and this is obviously before we will make the dividend payment.
Based on this strong financial position, we are well-equipped to continue to support the growth mainly and firstly on the organic side and Ulrich will shortly come back to talk more about how it now drive the new push for further organic growth. This is investment in capital expenditure in R&D, in innovation and further driving the growth but also the good returns of ABB. And there is no question that item number one gives the highest returns on investment.
Second is to continue our dividend policy and drive the dividend up over time in a sustainable way. It's very close to our heart and we have continued that obviously in 2013. The third is to spend money on acquisitions, we have a good track record on the acquisitions we have done, the two big ones, Ulrich has referred to and most of the others are also developing quite well. We do all those acquisitions only in a very disciplined way. We will make no crazy moves when it comes to pricing or conditions around those acquisitions. We want to have good integration plans and make sure that we can take care of those acquisition and create value for the shareholders.
And finally, if you run out of ideas, and we have too much cash, we will return it to the shareholders either as additional dividends or as some type of buyback to the shareholders.
Then finally, the dividend, the Board has decided to propose at the Annual General Meeting to in case, again, the dividend by $0.02 to $0.70 a share that equals a 3% yield. It is in line with the cash flow, free cash flow increase of about 3% as well as the net income increase of 3%.
Swiss shareholders will receive this in the same way as in the earlier years as a reduction of capital, which is in tax efficient way of distributing the money. And on the whole trend over those years that we now on the fifth consecutive year of dividend increase.
So with that I would like to turn back to Ulrich, again.
Thank you so much Eric.
So let me just sum up the perspective on 2013 before we start talking about the next steps going forward. 2013 was a solid year, the team has delivered well as we have said. We are heading in 2014 in good shape. We have delivered growth. We have delivered on execution and the momentum is quite solid that we have especially on the execution side in the business.
So how do we see the goals, and how do we see the targets and the expectations against our targets? If we look at the development of the world in the last couple of years and expect the development of the growth throughout the planning cycle that we have given ourselves 2011 to 2015.
The rebounds that was expected did not come out as strong as we thought. Alone in 2013, the GDP growth of the world is about 1.5 point less than expected, which might sound not a lot but its about $1 trillion less growth that is out there. The investment decisions of our customers are a little bit more hesitant, projects are delayed, you don't see that only on the ABB side, if you also see it in the overall CapEx spending, which is about 7x [ph] growth that we expected in – over the planning cycle is 50% less on the CapEx growth than what was predicted not only by us but by experience at the beginning of this cycle when we put together the plan.
That means also that our markets are being significantly impacted and the market growth is about 40% below the assumptions that we have. So that's a fact of reality that we deal with and now let me just talk about what are we performed in this environment.
You might remember the targets that we have given ourselves and I would like to take a bit of time to comment on one target specifically. In the first 150 days of being the CEO, I met quite a couple of you, we are out traveling, meeting a lot you and there was one common feedback that the growth target that we are giving ourselves was confusing. And was not reflecting the like-for-like comparison that you would have liked to see.
In the previous communication, we had a growth target of 7 to 10 and that included a part of Baldor inventory and the feedback from you was please take that out and give me a proper like-for-like comparison. At a time, when we announced this 7 to 10, we had the like-for-like in a footnote and now we have refer to basically the 5.5 to 8.5 that you see here in terms of like-for-like organic revenue growth target is the one that we already announced at a time, when we came out of the target at the time it was in footnote in the future, we will use this as the main targets to make sure we are clear, we are transparent and you can easily follow-up on where we are going.
Against the target, we have performed base into the lower end of the range despite the significant lower CapEx growth in despite of the significant lower market growth over the years until now. So the CAGR that you see here is 5.3% is the CAGR from the start of the planning period until today end of 2013.
In the EBITDA and on the free cash flow conversion we are right on target. And that's something that I personally look at very, very closely. The margin and the cash needs to be in order in a business. And if that's an order then you know from an execution perspective you got a healthy business. We delivered on both of them. And they are right in the target range that we have committed. The EPS growth driven by the 2012 and 2013 hits that we had in power systems, we are not where we want to be, that's a 3 percentage that we have here so far as a CAGR of the growth.
The operational EPS, however, is 6% which looks a little bit better, but we are no way fully comfortable at this point. The cash return on invested capital at a time when we put together the target was the assumption that acquisitive pattern would slow down, we have bought a little more of this investment in Power-One and therefore, we are quite happy with the 12% that we have despite a pretty acquisitive pattern in ABB. So that's the starters check. This is where we are today. How does the route look going forward?
Our market outlook has basically two elements, the long-term outlook for ABB is good. It's really solid. If you look at the needs of the growth of the power infrastructure side, the investments that will be coming, I'm very optimistic that our capabilities around reliable and efficient transmission and distribution offering will be in high-demand power customers. The same for the automation side, whether it's in the traditional market to really make sure we are competitive – we are helping companies to be competitive in the traditional markets or whether we are helping emerging players to improve their productivity to produce a quality that's a long-term a very good market out there. And we are right-positioned to take these opportunities.
The short-term outlook, however, is uncertain. We have some macro indicators that point towards a short cycle upswing and we have seen a short cycle upswing in some segments of the market. But, it's too early to say that certainty in the out swing every where yet. And on the long-term – long cycle part of the business with hesitancy on decision-making is still around. This is something that we have to deal with. This is something we have to respect and get our house in order expecting the short-term, the large infrastructure projects and the large investments on the project side might still be subdued.
So where does that lead us in terms of our top line development and where is ABB? In terms of the top line development, if you take the revenue trend on the right side of this chart you see a symbolic graph for the revenue trends that we are seeing. From beginning of the planning cycle until today a CAGR of about 5.3%. The remaining two years of the planning cycle 2014 and 2015 are characterized by the following drivers.
A) We have slower than expected market from the development I just showed in fact some figures around. Secondly, we are going into 2014, there is $3 billion lower backlog than what we went into 2013 with. Thirdly, there are still delays in large project awards, the customers are hesitant to give this project out. And fourthly, we have started successfully the PS reset and that will take time until its fully implemented selectivity shows in signals of an improved auto gross margin, its too early to call it a full success but we are in a good swing.
So if you look at the growth trajectory here, we have 5.5, 5.3% CAGR until today. We are going to have a moderate – more moderate outlook for the next two years. And what it means in concrete terms is, against the target of 5.5% to 8.5%. We expect 2014 to be a challenging year in terms of revenue development. And we expect 2015 to continue with the growth trajectory on the revenue side.
Let's combine, kept it as CAGR over the entire planning cycle over the full five years or 4% to 5% that's the expectation that we have against the target over the planning cycle. Key drivers lower than expected economy and the PS situation that I've explained to you. A lot of our competitors would be happy to grow revenues at 4% to 5% in the CAGR naturally its clear we have the ambition to grow strongly in the long-term future of ABB. Also when you look at it with reset global economic development, the ambition level compared to the global economic growth is unchanged. So we are not taking down the ambition, the ambition leads us to a slightly lower CAGR in the market which is not developing thus far.
The two key health indicators that we mentioned – I mentioned before, the margin and the cash conversion, we have the clear expectation to stay within the margin bandwidth and the bandwidth for cash conversion that we have in our target.
On the EPS side, we will drive hard to get towards the 10% CAGR and on the cash return, on invested capital given the more acquisitive pattern, our expectation is that we drive the zero up to mid-teen level by 2015.
So these are the expectations against our targets. So we are not changing the targets. We are communicating to you our expectation towards this target that we have set for this planning cycle.
So how do we deliver against these targets, and how do we make sure we deliver even in challenging time, good value creation in ABB.
When you look at ABB, that's very often some of you come and say what is this company really about if you would have to describe it in a couple of sentences in a very simple way. And here we have put it together. Basically ABB is around power and automation offering. Technology that helps, the electricity flow in the entire electricity value chain, product and technology that help with the automation of industrial glance.
Both power and automation goes into three customer segments, utilities, industry and transportation and infrastructure. So there is quite a market out there for automation on the power side, power plant automation as it comes. There is also significant market for power in industry. And in the past very often some people confused the power offering with the utility customers face. We have a power offering that we sell in all segments and the utilities in the industry and also in the transport side, if you look at rail side electrification of the rail business base the fixed infrastructure to provide power to the power lines of rail that's also a power offering that we have.
And given the nature of our global footprint we do this all around the world and in every key market that we are active in which are now more than 100 countries that we are in. So that's ABB in very simple terms. For what, before whom and where?
Now let me run you through what this focused area of designed meaningful at ABB and the development of ABB in the future. We have committed to profitable growth business led collaboration and relentless execution. And the focus is to drive stronger growth with a stronger focus on organic growth and to improve profitability of the business. And two key measures that will be much more in the forerun is the earnings per share and service of the business.
So when we take the profitable growth piece let me demystify a little bit and share with you what is really means and how we drive that and how do we go about it, and where are we in the journey of rending up the momentum? For us profitable growth is around penetration that means selling more of what we have to customers that we already serve some here. It's around innovation having new value of propositions for our customers, can be on the process side, can be on the product side and its around expansion going into new segments for ABB that we see has a directive and we see has value-add for our customers and us.
To get going in organic growth and to understand where we are, we conducted into first quarter under my new leadership. We conducted a rigorous navigation check. And we said, so where do we staying in the key markets of the world, we took all business lines in all key countries. And all business lines in all key industries and we met where we are in a very honest and transparent, maybe we challenged each other, we worked this through and the traffic light right here you see basically a conceptual picture how ABB has been assessed. Green means, we are number one or two in the market, yellow means we are three to five and red means we are not amongst the top five.
And the outcome of this process really helped us now A) To have a good transparency on where we are in this strategic segments that we served. But it also helped us and we are spending a quite a bit of time already to get, we do spend much more time as a leadership team on all levels of ABB to prioritize and focus. The leaders say okay, which are the yellow ones, are we taking on, how are we taking them on, how do we place investments, how do we allocate capital and how do we work together because there might be for example, a distribution opportunity between Pekka's and Tarak's business in the certain market knowing this year having a transfer on the table helps us to drive more calibration. And we have a clear ambition to be number one or two that means green in the segments that we focus on.
This map help us also to address the portfolio quality overall, where are we, where we need to head and where should be maybe not play -- should we not play? You have seen us divesting the change that business of Baldor I mentioned that before, we got a airport out in South Africa in the Kruger National Park that is not really a core business for us. We got that one out. And we will develop the portfolio continuously by adding and by pruning wherever its appropriate.
So let me give you some examples around profitable growth and bring a little bit more life into discussion, its almost on penetration, innovation and expansion and also say that its about a new offering, new customer segment that we have to strengthen or geography that we want to do more. Here are the examples, we will not go through all of them otherwise we would be sitting here until tomorrow morning and I know that you don't want to have that one.
So let me take out some highlights. Localization of footprint making sure, we have a competitive offer, locally designed based on local product management in key market is a key differentiator of ABB. And Bernhard and his team recently opened two new factories in the emerging markets switch gear and transformers. These factories are producing locally designed to local demands product and they are being sold in the local market in line and based on our global manufacturing processes where we have to rigor the execution, the quality assurance and to use this new facilities not only for local supply, but also as export house.
An example for innovation, better doing more on the innovation side for growth, it's the use of – easy technology in new fields, Veli-Matti and his team together with Pekka has developed a ship propulsion solution -- electric propulsion solution for ship. And the benefit for the customer is the propulsion set needs less space on the ship, so it could have more cargo and a fuel efficiency up to 20%. On the ship more than half of the operating cost is fuel. Cutting more 20% out of it is a huge gain for the customers and we are very optimistic that this technology will help us to drive growth by having attractive value proportions for our customers.
You saw the press release hopefully this morning that we came out with on EV charging. Together with Daimler and BYD Auto in China, we revolutionized the Chinese mobility segment. We have teamed up and we will now established the first countrywide fast charging network in China together with this partners.
We have seen probably today the press release on the Daimler side, BYD Auto press release, we coordinated it. All the three of us went out together, this will be thousands of charges. Historically, the biggest charging network that we had was Netherlands with 220 charges – 220 and now we are talking about 1000s of them that we are going to do together with this partners. This is an expansion. This is a new segment. It's a new offering of ABB building on our strength and power electronics that we have to scaling our drives business on the operational side and the supply chain side. We have the quality and we have now an additional segment and we are clearly this is a breakthrough development not only for ABB but also for the world overall.
Working with customers together will be a stronger element of ABB's future growth even stronger than we have already. One good example is the collaboration that we had with Statoil on subsea technology development. Taking the platform subsea into 3000 meters of depth, which is 600 kilometers out in the sea, it's a technological challenge. And between Statoil and ourselves, we are investing about $100 million over the next five years to really get this technology up to the maturity level that we can really install it at will, if that's operational a company like Statoil can save up to $500 million of CapEx annually by replacing existing technology not with same technology with new subsea technology.
We shouldn't always talk about large things, sometimes the small things for ABB portfolio also very relevant. If you look at the moment in emerging markets, how many diesel gensets are being used to for example run irrigation pumps for water supply in farms in remote areas in emerging markets that is something that is a very common practice. And in India, we have now developed a set basically a solar driven pump solution off-grid that will help farmers to get the water out of the ground, it's a panel. It's a inverter. It's a drive and a pump that basically helps the farmer to pump the water out independent of diesel fuel and independent of the grid. The Government of India was so impressed by that solution which is really packaged and easy to install that they have subsidized this now in the fourth quarter of last year. We have the first 500 already out and I expect many 1000s to come over the next years especially in emerging markets.
Last example that I want to give you is an example of market expansion. I mentioned before Sub-Sahara Africa opportunity for ABB and we recently in a mine in Zambia in Konkola mine, we installed a substation and a complete supply, this is the largest copper mine in Africa. ABB is powering it up with very reliable infrastructure and electricity supply.
So you see, there is tremendous growth opportunities out there. These are amongst out of the well met in our treatment and now we are going out and investing in them and drive relentlessly the performance improvement in this segment.
The segment key focus area is around business like collaboration. This is about getting more value out of ABB power customers by combining and bringing together the strengths of different pieces.
And today, I want to show you three examples. One for packaged solutions, bringing the offering of different divisions together to serve a customer. The second one around the current management teaming up to serve -- globally and thirdly, share platforms on the operation side because we have not only collaboration opportunities towards customers. We have a lot of operational improvement opportunities within ABB.
On the package solution, you have seen probably the press release couple of weeks ago, we won a really great honor up in Sweden maybe basically build a new high speed train without building a new train.
The concept is the propulsion set all the electronics is being ripped out of the existing tin box, which have trained basically. We have put in the new technology in which among others was proven in the upgrade of the ICE, one high-speed train in Germany, we put that in there and the customer basically gets a new train without having to spend money on the tin box. On this project, Switzerland and Sweden, the different division have worked together in a fantastic way I was up there together with the team signing the contract with the customer.
It was great to see people from all over the ABB world working together across different divisions to get this order for ABB. The second example is around the current management look food and beverage is an industry that we are penetrating and where we are working very strongly to get more order. Here is an example, its Pepsi, in Pepsi, we have basically helped them to operate bottling plants and they have many of them more efficiently and really the target is here to reduce the electricity bill of the plant by up to 10%.
Now, if you run a bottling plant, the energy consumption is significant. The investment itself, paced itself in less than two years, so also for the CFO of Pepsi, this is a great value of proportion. The third example that I want to use is a shared platform example. I talked about Africa before. Our joint operations in Longmeadows in South Africa that it basically holds all the divisions there is common ID platform, common HR will be a model for future market penetration. From there we are also hosting efforts to tap stronger Sub-Sahara Africa. So this is a great model for us to get more synergies within ABB by operating smoother together.
On cost I have already talked about the traditional pattern of ABB on cost reduction before. Let me talk about a couple of new areas on cost reduction. We have committed to take 3% to 5% actual end of cost of sales out of our cost base every year. And since 2008, when the crisis started we have done this. And we will do this going forward. We will not give up and we will keep the momentum. And how can we keep the momentum by continuing what I showed before but then by adding additional areas.
One is white collar productivity, ABB has about 150,000 people only 40,000 of them are touching the physical product. All the others are some kind of white collar people. So can we free our resources for growth? Can we have more sales time focused on serving customers rather than an internal administration, absolutely yes. And this is what white collar productivity is about.
The second area that Eric has the responsibility for in ABB is to have a stronger focus on cash management. Our inventory turns are today not where we want them to be, we want to drive this harder, we want to free our capital to make sure we use the capital for growth rather than having it locked up in our warehouses.
And on integration Greg will talk later on more about integration experience that we have now really not only together, but also institutionalize then personalize. This is an area where we will continue to deliver over the years to come. So just to pick one example, on the white collar productivity side, this is an example out of our robotics service growth.
As you know, a robot is a service intended product that is being used in automotive in general industry. Historically getting a service contract towards a couple of weeks of work going back and forth with robots descriptions.
Today, the robot service technician walks with an iPad into the factory. The robots speaks to the iPad and tells him the operating pattern. The service salesman talks with the maintenance leader and says look here is operating pattern, this would be the right service pattern that I would suggest to you, which is being supported by a configurator on the iPad. And it's a maintenance leader says yes, and very interesting I would like to have both, he says okay, how many days of week you operate, he presses a button and he gets the result of it. He can do it there. And if the operator and the maintenance leader wants he can sign the contract there right away, enormous amount of productivity gain and also a much better cost of momentum.
So let me sum up the areas, the focus areas. The navigation check is done. We have a systematic approach implemented. We have focused activities on the way. And we have the performance management established. And with these elements together, I'm very confident that we are going to deliver more value in the future. The global team is mobilized and is ready to deliver. And Tarak will now show you how penetration is being worked on in his business to give you a very concrete example what's happening now today as we speak.
Over to you, Tarak.
Thanks Ulrich. Good afternoon ladies and gentlemen, it's a pleasure for me to share with you what our low voltage products team is doing in terms of growing profitably in the market penetrating the market with products and solutions and our partners which are the distributors.
Let me give you a little bit of a short history lesson on where we are from a low voltage products perspective. If you remember we started the journey in 2010 has a division. And over the last 4 years, we have taken this business has a collective team from 4.6 billion up to $7.7 billion, roughly $1 billion of growth each year.
Not only has the top line improved but also we have been able to take a bottom line up correspondingly from $900 million to $1.4 billion. What I'm particularly proud of that we have managed thanks to the Thomas & Betts acquisition is geographically balanced the low voltage products business in line with the market. So we were euro-centric before. We are much more in line with where we see the low voltage products market.
As you can imagine a growth like this requires an organic component and an inorganic component. So let me walk you through what we are executing based on what Ulrich just described to you starting in the third quarter and then moving on forward in the fourth quarter and into 2014.
So you can imagine the top 50 markets for our business up there. We classify our customers into specific categories end users which use our products on a daily basis, original equipment manufactures that develop machinery equipment solutions for the end users where they incorporate our products into the electrical production and distribution system. Then you can imagine controlled products – control panel manufacturers which you call panel builders or distribution equipment manufacturers depends on which geography you are talking about. And all of these, we serve through our distribution partners in different relationships we have worldwide.
So as Ulrich mentioned before, green means we have a position of strength, we are in the top two. So we map our 60 product lines. 115, 000 to 130,000 SKUs globally into the 60 product lines and we map those 60 product lines strength in each of these 15 markets by customer type. And by our relationship with our distribution partners and based on what we see us the inventory, we have put together a product execution plan for growth and it's a project because we have 470 individual projects to grow, I will take you through a few of them, so you get a better idea of what do we mean?
So the excess represent a targeted attention on a specific customer type in the particular market with either a product, a solution or a distributor relationship that we will leverage to grow. And let me walk you through a few of those examples to give you a better feel for exactly how we are executing in the voltage products as a team in these markets to really penetrate the market in a profitable way from an organic perspective.
So if you look, these are typically the products that you would imagine that we would use to growth the business. So what Ulrich mentioned before, we are very proud of the Emax 2 circuit breaker which actually acts a power manager. So it actually helps with load shutting and managing the consumption of power and energy by our key customers. That product particularly has a great opportunity in Germany and U.S. to gain market share and allow us to grow organically. It's one of our best products in terms of the operational performance and we believe it is targeted in the right segments for growth.
A second example I can share with you is the Welcome 8 door entry system. Imagine this inside your apartment if you happen to have one in China, you would be a potential customer for us. And this product was designed with support from the German colleagues and the Chinese colleagues in the Genway business which we acquired about three years ago. And this product now in 2013 has won many design awards has been one of the fastest growing products we have in China in terms of year-on-year growth.
So these are just two illustrative examples of how particular products targeted on a specific geography to a particular set of customers result in a significant amount of growth for us on the organic basis. The last when you see the Smissline socket system. It's particularly designed for critical power applications, hospitals, data centers that will allow you to on a hot basis, on touch safe basis add electrical circuits and remove electrical circuits. And that you can do while the electrical system is operating in the hospital or in a data center. And you can realize the value of having a very high up time in those particular products in these segments which are of extreme interest.
As you move from products to solutions, here is a solar offer. Solar solutions offer from a product point of view all these products that ABB work together, we put them in a package, they will be deployed in a global basis to a system integrator or an OEM. And we try to provide the logistical support through our distributor partners and the goal of an offer like this is to be global and provide a solution for people who are doing commercial scale solar power plants almost anywhere in the world.
This business has grown extremely well for us in the last two to three years. I'm very pleased to see that we have been able to replicate the model not just in one geography which was Europe to start with. But this is also extremely successful for us in the United States also in India and particularly very strong performance in China in the fourth quarter for us in 2013. So we are offering this across the world and it gives a great leverage from an organic growth point of view.
If you move on from products solutions to our distribution partners, you remember with the Thomas & Betts acquisition we got great access to distributors and Thomas & Betts relationship with distributors that relationship now is being leveraged to pull through with the Thomas & Betts team running our business in United States, they are helping us pull through the ABB Low Voltage products in North America.
Correspondingly, our strong relationships in China, in Western Europe, we are using those relationships to pull the Thomas & Betts products through our distribution partners to the end customers. So there is one example of how we are working with distribution channel partners. On the line – below the yellow line you see countries where we have invested actual in a different way to partner with distribution partners, channel partners.
There we have put 400 sales people out on the street. The idea is to create demand, generate the value propositions for the local markets that convince the end customers that we were just talking about, the use of the products. And then we service that demand from a logistics perspective through our distribution partners in order to deliver the kind of performance that allows to scale up very quickly in the geography using a distribution partner relationships that we have.
So these are three examples of how we leverage what Ulrich just talked about, do an inventory take a focus effort, figure out exactly where we want to dedicate our resources either on a product side, on a solution side, or a partnership side. And in many of these examples because we have a common view thanks to the view of pie across the different divisions would able to compare notes between different business segments within ABB and in this particular market if you have strong distributor relationship better why don't help yourselves some more of your products in that market because we are able to work together team together.
It's the common view that allows us to collaborate at a business level, and I would like to hand it over to Greg who can probably go through a little bit more in detail what does business like collaboration mean. So with that I thank you for you time and hand it over to Greg. Thank you.
Thank you, Tarak. Good afternoon everyone. So I will cover a topic that only underlined as a very important area – focus area for us and that's business like collaboration.
And in business like collaboration what we are really doing is, we are focusing on certain topics that can create even more value for us from a growth perspective that could be looking at it externally with our customers and saying how do we grow, how do we deliver even more value to our customers or to our shareholders in terms of greater growth, better returns.
So what I will do is, walk you through a couple of areas now and maybe talk a little bit about how we go about business like collaboration within the management team and across the company. We really break it down into three areas, one is the spirit of really working naturally together Tarak hit on it when we find opportunities to collaborate where we can help each other, how do we do that to create more growth.
We look at our customers needs and make sure that our organization is not a limitation to getting the right solutions in front of the customers, selling products as bundles, packages. When you look at the objectives here, its really to drive that cross BU and cross division interface. And how we bring them the whole solution together.
And what we have done and already working with the entire AC has test the EC members to take the different areas of business like collaboration that really drive it and led by example. In my case, its in the area of service and also integration, how do we bring companies in, collaborate with acquired companies to create even more value together.
And really the underlying cornerstones are to take this learning and these examples and really drive a collaboration process that is really permeated across the whole company, and we can take it not only on a global basis but in our local countries in our local businesses.
So let's take a look at two areas where we are doing exactly this and talk a little bit more about how we are doing it and what we expect to get. The first would be in the area of service and service and integration are really the ones that I want to go into more deeply.
In service about 2.5 years ago, we kicked off a service strategy. And with that we set a goal to say that we can grow our service business even faster than the group in total. We thought this would be very good not only for us financially because our service margins exceed that of that group. We thought this would be good from a customer standpoint because our value proportion with our customers is really a long-term commitment to our customers. Our customers are making investments in buying our products and systems and services that are 20, 30, 40 year investments. And its really important for a supplier like ABB to be there along the entire lifecycle of that investment.
So that we can not only help them install, we can help them maintain, we can train new people as they come on, we can refurbish and we can upgrade that equipment. And that's a great revenue stream for us and we want to get even better at doing that. So as we kicked that off 2.5 years ago, we found that we are generating that momentum that additional growth, but we also found is the installed base is a huge opportunity for us. We have identified around the world $300 billion of actively running products, systems, software that's out there in industry.
When Ulrich talked about who we are from the grid all the way through to the factory, on those grids in those factories $300 billion worth of equipment. And so with that now, we catalog where does it sit over the last four or five years we built an internal database of which customers have which equipment and where are they. And we have about $200 billion of that $300 billion to our catalog to know where they sit by address, what type of equipment, GPS coordinates and that allows us to work that installed base and really mine that for additional revenue growth.
Today we think we are capturing a little better than 25% of the annual opportunity on that, we like to take that to a higher level, we could capture that 40% of that installed base opportunity has an annual annuity that comes in.
So how we gone about that? We have gone across the entire organization and we found the best practices and we have looked at those to say which ones can we productize as service products, we have done in each of the five divisions very collaboratively working across. We have done out in the countries to say which countries have those great innovative ideas, how do we catalog those, how do we put product management behind it and how do we roll it out to the countries that hadn't seen it before.
And this is really the engine behind how we are driving that growth. In addition, what we have done is, we have added additional people to cover that installed base. Service sales, dedicated service sales people, service engineers that can go out and be there not only for reactive service but proactive service to go out and work with customers, talk about how we can help them stretch their assets in a greater return.
So went about this two years ago with launching what we called how-to-wins, short it was about adding more service sales and you see that on the vertical dimension. It was adding more product management with 400 product managers. But, it was also about how do you grow a service business culturally. How do you put the right building blocks inside the business division by division, business unit by business unit and really continue a journey to drive a culture around service.
And that's what you see here in each of these boxes are different elements that what makes a successful service business and we simply call these how-to-win, these have been rolled out now. We took the first set of countries on wave one two years ago, the second set which covers now 50 countries in the last year. And we think this is going to give us the ongoing momentum in terms of how we collaborate and bring ABB together for our customers to drive even more growth.
So let me take the next example of what is underway on business led collaboration, and I think it's an excellent one for us to talk about here today. It's acquisitions and the post merger integration. This is very much about driving growth, how do we take companies that have cultures of their own, bring them inside ABB and create even better company together than what we had before we started. And so having been personally involved with this being the integration manager on Baldor working closely with the DM division with Ulrich having been personally involved on T&B, on Thomas & Betts being the integration manager working closely together with Tarak. What we have done is take all those experiences that we have had over the last four or five years as we bought company's large, medium, small and take that as learning.
And how do we start to break it down now and create the next level of excellence in terms of how we do integration. The things that can drive an institutional know-how, so that we can take people that are strong in leaders and then have great capability. But also put them through the things that we have learned so we don't have to do this one by one. There is fantastic work that's going on here. And of course every acquisitions slightly different but there are some basic components that come back over and over again as we look at these acquisitions.
So what are those? It's aligning. And its aligning at the time of the due diligence to make sure that you know what you are buying and why you are buying it and you start to think ahead of how you are going to integrate the company. And so that's really the beginning and we take it through retaining, really creating a space for the new companies management team not only to breath but to thrive inside ABB. And to really feel connected to a new company as strongly as they felt connected to the company that they were with at the time of acquisition to support, to support those teams really encourage, really talked about Baldor adding some automation, adding some capital, doing the things to help them to grow and we have done that over and over.
Enhance, now we have to look for the cost synergies, how do we do that in a smart way? Sure, at the time of alignment we had a business plan but now engaged the team together and say hear to our assumptions, do you have ideas that could make this even stronger, what shall we do together, driving our cost and supply chain overhead G&A but the best practices, this is where things start to take-off. When a team is being listened to that's a newly acquired team. So we have some good ideas of what we could. We grab those ideas.
Also the best practice can come from either side. Either the owner ABB or the acquired company, creating this culture is very unique and I think it's a real differentiator of ABB. Because if you look at ABB, we are in many places around the world and we are extremely multi-cultural. Why not take that same respect and cooperation that we have within the company and apply to acquisition. And that's exactly what we have been able to do to create this kind of momentum. Grow, of course, this guy is back to pie and as we think about how we do things, a lot of it has to do with penetrating deeper into markets. Tarak has a great example in T&B. T&B is helping us in the U.S. and in Canada and Mexico in a great way with Tarak's business.
Let's have that same help when we go to China where we have 20,000 people in ABB. And I think T&B had a couple of dozen. And we certainly now, what can you do when you bring ABB and T&B together in China to get that growth and that's really the growth plans. And of course implement, but its implement not just to create results, its implement to have credibility. You are building trust when you bring companies together and it's the say do ratio of what we commit to and what we deliver in terms of how we work together that's as important as driving the results. We do drive the results with concrete actions, clear accountability and we report that back into the EC on a regular basis. And coming back to make sure we are on track.
So with that let me summarize two key points, one is business led collaboration is alive and well and I think its unlocking huge opportunities for us to go the next level inside the company. And I think number two, this will drive additional value as we continue to do this and build upon the concepts that you see here.
So thank you very much. So let me turn it back over Ulrich.
Thank you very much Greg. So in the last two examples we wanted to demonstrate to you what is focus area connection really mean? And that we are living it everyday. We have changed to pattern of ABB. We are working differently together building [indiscernible] very well in the past, taking it to the next level of performance and really make sure that out of collaboration, out of next level of execution and profitable growth we can drive more value creation.
So to sum up, let me just share with you what we expect today and what will come? Today, we shared with you where we are in the year, quarter building results there. The expectations against our 2011 to 2015 targets that we are not changing certainly due to expectations against these targets and the three focus areas in actions.
We have embarked now that we have kicked off the three focus areas. We have embarked on the journey to formulating to ABB long-term strategy. And we are together in September at a Capital Markets Day, we are going to give you to comprehensive strategic outlook of the ABB of the future long-term be honest [indiscernible].
So to sum up, today ABB has delivered a solid year. We have executed well, cost out, we have thrown revenue to an all time high. The team is working extremely well to guide the leadership transitions has been done in a very smooth way. We are facing an interesting market environment where the long-term perspective is strong and the short-term perspective is still uncertain. And we have the right measures in place to navigate through this times and to continuously value.
The priorities are clear, the team is ready to act and we are committed to deliver more value to our shareholders in 2014. Thank you very much for our audience. And now, I hand over to Yelena [ph] to manage us in the Q&A session.
Unidentified Company Speaker
Okay. Just a few couple of rules before we actually start. We will take some questions here from the room and then we will take a couple that are on the call right now. Please do not ask a question until you have a mic in your hand, so that everyone on the phone can actually hear you. We have two people on either side here with mics.
If you have a question and your on the Internet or on the webcast there are instructions on the side as to how you can asked to be put into the queue. So with that we start with the first question. Andreas?
And please when you start, can you say your name and the company you are from so that everyone on the phone can actually hear you.
Andreas Willi - JPMorgan
Thank you very much. Andreas Willi, JPMorgan. First question on your comment on the outlook, you said its challenging year for revenue growth, do you expect to make progress on the underlying EBITDA margin excluding the charge of 2013 and to what degree do investments for the growth focus impact or not impact 2014 in terms of sales or R&D, you may plan to increase.
And the second one on the larger orders, the customer hesitants, I think Q3 results you kind of indicate that you would expect that to kind of reserve or start to come through in 2014, what's your view now, is this first half, second half year event in terms of somebody's large order bookings you have been waiting for? Thank you.
Okay. Before I get started Andreas, if I have done my navigation check, right? Happy Birthday. And all the best to you. In terms of the outlook for revenue growth that we have given you, look, the CAGR that we have formulated is 4% to 5% over the planning cycle. That is including the previous years and 2014 and 2015.
If you look at a business that had a $3 billion lower backlog compared to the previous year, if you have a business that a large order in take is still slow, we cannot expect a huge revenue growth in 2014.
However, we are optimistic that before the efforts that we are taking now on creating additional orders. We will get back to the revenue growth trajectory in 2015. So that's the pattern that you can expect in that context. On the EBITDA side we have committed to stay between the range and work on that on continuously, its very clear that, we will work very hard to avoid additional charges like we have at this year and avoid the run offs and if that all comes through, is there room for outside potential, yes. Am I committing to deliver it on it, no. Today this is what people report on throughout the year. That was the second point.
The third point, on the investment pattern and the investment focus, long-term strategy of ABB at the moment to become stronger and stay a leader in power and automation is unchanged. The heat maps help us really to identify the areas of focus.
Now the first priority as Eric as laid out is organic growth. And he will fuel this organic growth. It can be investment in sales people; it can be investment in market intelligent; it can be investment in local product management; it can be invest on the service side; it can be investment in CapEx in certain areas, so we have a clear priorities defined how we allocate the capital, how we allocate the time to really make sure that we get the biggest possible result out of our investments there.
On the order side, let me hand over to Eric. You want to take a hit at that one?
Yes. So on the larger orders on the pattern, answer for you question for Andreas, we have still a big tender backlog mainly in power but also increasing this on the automation side. But the award for those projects is as slow it has been in the early quarters. So its hard to predict when that will pick up, before we see the – there should be a bigger award of projects in 2014 than in 2013 from what we see today, how much we will be able to get out to that, we will see when we get to the specific tenders but the activity is very high.
Unidentified Company Speaker
Michael? Sorry, we're just coming right here.
Michael Hagmann - HSBC
Michael Hagmann at HSBC. If you look at what you've been talking about today, if you look at penetration and expansion and operational excellence, relentless execution as you call it, none of that is new. We've been hearing that for about 15 years in varies guises. Your competitors are doing the same. So what are the one or two key attributes in your value proposition and/or what are the two, one or two key competitive advantages which actually allow all of those initiatives to lead to a higher profitability?
I think that one is on the growth side; we do it together as a team. So, we really sit down as an executive committee. We have monthly growth board, where we bring all the perspectives in and then we discuss that should ABB focus on and we help each other with our experiences, we jointly defined where we should focus on, it is cost large innovation projects jointly and see how do we are going to run it, on expansion moves and the acquisitions we're going through. So I think that's one of the differentiators in the term.
The second one on the execution side, I think we do it better than most others to be -- I don't want to be arrogant here but if you look at the track record of cost reduction since 2008, every year relentlessly taking out the cost. Last quarter again $350 million that's basically where you can set a clock and we have a good process going. We are continuously also expanding the code of this cost reduction exercises. And we do it in a smooth way without business interruption.
We don't have large layoff programs where we have problems with the unions at large scale. We don't have business interruption from a quality side, we are really running that in a relentless way and I would call this two of the key differentiators. So, the team work and the way how we implement these activities clearly differentiates us from others.
Unidentified Company Speaker
Let's take one from the left hand side here.
Andrew Carter - Royal Bank of Canada
Good afternoon. It's Andrew Carter from Royal Bank of Canada. I had three questions please. The first one was just looking at the backlog and obviously that's down 10% year-on-year. I wondered if you could actually give us an idea to what the number would be if didn't include Power Systems perhaps obviously because you decided to walk away from some of this bear in mind, it gives a better feel for what the other businesses are going to do.
The next question was just on the base order trends and I think when you were presenting, you suggested that the number that you gave for Q4 I think the 4% growth was adjusted for Power-One. And I think the number is unchanged from what you presented last quarter, which you said had got, didn't address the Power-One. I just wanted to make that there was a -- that those numbers were like-for-like consistent we could be confident about that being an organic growth in the final quarter. And just sort to really carrying on with base orders, would you mind just sort of running through what you're seeing on a geographic basis in terms of the base orders because I think that would be quite useful.
Okay. Look, if you allow me, I will take the last one, first and then hand over to Eric for the two other ones. If you go around the world at the moment, it's a really interesting situation. Take for example Japan, we see in Japan a ramp up of our own orders and we see a ramp up of our business activities there, which is really great. The reason for that it is – very unfortunate incidents around for Fukushima. But Japan is investing in infrastructure side and we're seeing good business coming out of that one they're also rebuilding some automation and we are participating in that one.
Korea is another one. In Asia, that we are quite happy with the developments it's quite a strong partnership between the local team, Veli-Matti has there a strong business in Korea serving the customers very well. India at the moment, they are waiting for the elections which come in May. So, we have to see at the moment investment climate is a little bit moderate and that's something that we also see. In the China side, the automation fees on the China side automation base orders are really coming up and we are grateful to that point. I think we are pretty well positioned mind you also, our robotics business is being reported on the base orders, which is growing very well in the trend of more qualitative growth in China.
If I go then to the Americas, in Brazil, at the moment there is really not the momentum anymore that we saw a couple of years ago and it will probably take a little bit more until it comes fully back. I'm in Brazil in a couple of weeks-time, we are opening new factory there and we are still committed to the investments in that market. In North America, in the U.S. the more towards OpEx the order goes and the more towards consumables the order goes the better the momentum is.
On the power infrastructure side, we don't see yet a large momentum we see good tender backlog and if you go then on the automation side, on the large process investments, there is a lot of process capacity being build or being initiated at the moment in North America it takes a while until we get the orders there but that's the picture there. And then you go over to Europe, we had a really good year in Germany which is the largest European economy and that has grown quite well and I expected our very good positioning there.
Also, the employer positioning, the way we work and the channel, the way we bring new products out is really, really good results. In Spain, margins has picked up again. So we're cautiously optimistic on that one. So take a just couple of slippage, if you take three steps back, you will say the more OpEx oriented the spend is the more likely is that we get foregoing the more less CapEx and up to value chain it is, the more hesitant customers are. So, with that said, I'll hand over to Eric on their order trends and the backlog.
Yes. So, on the backlog, it's about $3 billion that is out of the backlog little bit more than 2 billion comes from Power Systems. So the other divisions including process automation also has the reduction in the backlog. So, if you report that to 10%, you can say that two thirds come from Power Systems and the rest comes from the other divisions.
Obviously in the Product Divisions and Low Voltage and the largest chunk in DM, the numbers of the backlog are not that big because it's a higher turn rate on the backlog to orders. On the base order term, you are correct that the 4% includes effect of Power-One in both quarters but it's not a major effect on the number.
Unidentified Company Speaker
Okay. I think Martin.
Martin Wilkie - Deutsche Bank
Thank you. It's Martin Wilkie from Deutsche bank. A couple of questions, firstly, on the Power Systems, you comment that you like the underlying quality of the business. And so, given what we saw obviously few weeks ago, we you talked about some of these problematic contracts, does that mean that the reset you did last year stepping away from these EPC contract, is that the only stepping away from businesses and Power Systems that we should expect you to do, so essentially what you have now is, is what you intend to continue with.
And the second question relates to that, across power more generally so including power products, you showed the heat map with the greens, reds, and yellows in terms of businesses where you are number one or number two or lower and that might be used for divestments. As part to that, do you also think about where those businesses might be five years from now in terms of competitive dynamic in pricing and is a similar process going on around that? Thank you.
Thank you, Martin. I think the two excellent questions. On the Power Systems division, look we have delivered 5% margin this year despite the setbacks that we have had. So a lot of EPC companies would be very happy or a lot of system companies would be very happy to have 5% and you deliver that because you got your house in order in quite large parts of the business.
If you look at the HVDC subsea connections that we have delivered great execution of the team, on time, on budget, customer is happy and there's a lot of business out there. If you look at the way, the global power field is developing distance becomes one of the key issues and we are the company that can help with the distance. If you have a renewable plant a wind lasting power plant in all piece of Japan and you have the power consumption in the Southwest, who helps it can be ABB. If you go to the U.S. on some of the large power connection taking hydro power down to New York, if you look over in Russia, if you look here in Europe, so there is tremendous amount of opportunities around long distance and we are the right guys for the long distance power transmission at very high voltage level with good technology but high reliable and low losses.
So, this is a business I like it and I think we should continue the investment in doing it. The specific issues around offshore wind, we have entered the market a couple of years ago, because we are committed to help the world to develop a stronger renewable energy pattern. So in that, it is a start-up technology that was started a couple of years ago and unfortunately the ticket that you have in this start-up technology is not $5, it is $500 million or $1 billion, you learn on that. We have become much, much better in understanding the key requirements there and this is something when you start-up you have that, we are getting better at that.
From a portfolio perspective low value adds EPC contracts where we don't pull through anything for ABB and just do a little bit of construction with somebody, that's not our business and we have really in the reset exceeded the most of the activities there and we will continue to do so.
The offshore wind, we get that better and better established into operational process are becoming better, the technology is mature for example, how do you build this platform out there? Do you jack it up with a crane, or do you get a floating platform that you'll take it the very end – and let you drop on the ground then it sits there. There are difference risk profiles in that one and we have had some very good learnings around it.
Now, on the portfolio, look the heat map is the one piece of portfolio assessment and you should do it on different aggregate levels. You can't do that for power overall and say how are we positioned? And I mentioned Sub Sahara, Africa before, that's one where the heat map shows very clearly that we have tremendous opportunities and we should invest there and we are investing, Bernhard is investing, Claudia is investing down there Veli-Matti and Pekka are trying doing this together and mitigating the risk of entering a new market subscale getting rather coordinated in there as ABB will help us, therefore higher likelihood of success.
In terms of the portfolio optimization, look you have seen us investing in certain pieces that might have been a surprise. The investment in Power-One a lot of people said why do you go into that? And that's exactly one of this five year decisions or five to 10 year decision where we said okay that the market -- the moment of market is down, great opportunity to buy a good asset, to integrate it and when the market comes back, then we are well-positioned before number two position. So, yes, absolutely we are doing it that way Martin.
Unidentified Company Speaker
Okay. We're going to take two calls, or two questions from the, I guess conference call. First one.
The first question from the phone is from Mr. Simon Toennessen from Credit Suisse. Please go ahead.
Simon Toennessen - Credit Suisse
Yes, good afternoon everybody. My first question is on with regard to your organic revenue growth targets. I still find this quite confusing why you are still sticking to the target of 5.5% to 8.5% growth when you actually do expect 4% to 5% over the period and particularly that you've given that you don't provide anymore organic growth numbers on a divisional basis.
But most specifically I'm interested and on the basis that your organic sales growth in 2014 looks slower let's call it low single digit. What kind of order intake or maybe even book to bill, do you need to see in 2014 to get to your revenue expectation that is currently implied for fiscal 2015?
The second question is maybe Eric, could you give a bit more color around cost saving expectations for 2014? Is it okay if we model sort of the $1.2 billion that we see now in 2013 going forward and should we expect pricing pressure to remain at the levels that we're seeing i.e. model in the bridge a similar net savings amount for the quarter?
And then lastly, on free cash flow guidance for 2014, maybe you could I mean you talked quite a bit about networking capital expectations and few targets just comes back to your historic range, there were some press articles stating that you're looking potentially into divestments of non-core businesses, is that something you consider going forward and I mean in that regard you talked about in terms of capital allocation about special dividends or potentially buybacks which is something that is new, which once would you prefer and given that if you continue to flag at least historically that the M&A pipeline looks good. Is that ever likely that we could see ABB doing a share buyback? Thanks
Okay. Thank you very much Simon. I'll take the last one and the first one and leave the others to Eric. Let me start on the last one and divestment and acquisition pattern of ABB look. We will develop this portfolio going forward. That's our job, that's the job of a good leader to take a portfolio and continuously develop it. That means we will expand the portfolio, we will add new attractive segments, the customer segment being new technology and we will keep doing that.
But what we will also do is, we will regularly look at the portfolios and say what does not fit into the direction or the consideration of ABB anymore. We have done that in the past, we have done it in the last couple of quarters and we will do this in the future.
And at the moment, when there is time something to announce, we cannot talk about more details. On the use of the cash book, I love to grow this company and I think the best one would be if you reinvest -- the good news is with all the work that we have done in the navigation check, we see tremendous opportunities to invest capital into the future organic growth of ABB. This is a low risk, high return investment if you do it right. The service piece that Greg has laid out is a very attractive one and we will keep investing in service in a very strong way, you will see us really continuing to push it and we will also make acquisitions to continuously expand the portfolio.
So, there is quite a lot of opportunity to spend or invest the capital that we are creating and if we would run out of the ideas on the organic growth side, if we would run out of the ideas on acquisitions, and if you would had served the shareholders with the right dividend then you would absolutely consider share buybacks but that would be to first priority and this is unchanged as we have talked about.
Let me go back to the organic growth pattern. Look, we probably can't never get it right for you, because if you would have issued new targets today then you would have said why you are issuing new targets in September again. Given the pattern that we wanted to give you an update today and really issue targets long-term targets in September, we decided that we go now with our expectations, we share this to few of our hardly against the targets that we defined couple of years ago. And in September we will then issue the long-term targets for ABB both in terms of the quality of the targets and the quantification and efficient level against these targets.
Now, on the organic sales growth, to give you a little bit more flavor, I think you call it right. And the backlog going into 2014 is lower than the previous year's backlog that means we need to work really hard to get additional orders, this is what we are doing, the pie approach has helped us to really focus and identify opportunities. This is not a one of exercise, this is continuous work that basically now every country, every business unit is working on.
And then you travel around the world in ABB countries, you find now basically in every office somebody working somewhere on a heat map which is great because it really helps to allocate the funds and resources we need. To have a good book to bill in 2014, we need to have a good emphasis and goods delivery on the short-cycle business and then we will be in line with the expectation of 4% to 5% CAGR of the cycle that we have communicated before.
With that, I hand over to Eric on the other two questions.
Yes. So you also asked about the divisional targets and they are in the track, we didn't tell them in presentation today but they are in the track which is on the web. So we continue to disclose the divisional targets as well as the achievement against those targets until – end of 2013. On the cost saving, the guidance remain the same as we have had in the earlier years 3% to 5% cost of sales. It is a white band, that's what, what we guide to their achievement in 2013 is somewhere in the middle of the band, so that's where we stand. The pricing pressure continues, many ISO of ABB, there is slight constant pricing pressure, they would have to live with that and the cost savings is the main lever to counter those price pressures.
On the free cash flow, yes we expect to have an improvement in free cash flow this year apart from their, effect on net working capital and also obviously seeing a year without big charges also we had for the Power division, our Systems division. And when it comes to the non-core divestments, if they will come we will announce when they come, like we did last year with the genset business in the U.S. those will impact the balance sheet, if we get the cash back which obviously improves our financial position but we don't see them as a poor quarter the free cash flow communication and guidance.
Unidentified Company Speaker
Okay. Next question from the conference call?
The next question is from Mr. James Moore from Redburn Partners. Please go ahead, sir.
James Moore - Redburn Partners
Good afternoon, everyone. Thanks for taking the questions, I have two, one on the PS margin and one on the organic sales growth. On the PS margin, if PS face $1 billion or $2 billion revenue decline in 2014 from the recess while fixed cost absorption not the EBITDA margin down to well below 9%. I'm thinking this because nearly half of the PS revenues are product based with systems and network automation.
And I know you walked away from the 9% but could you say if you're confident of reaching say a 7% operational EBITDA margin in 2014. The second question is one organic sales growth. And I think you – on your organic sales growth transparency because neither the 5.3% status check nor the 5% FY 2013 are actually organic numbers, you've not stripped out the $1 billion Power-One. But, you have committed to strip in your acquisitions over $50 million in a level and again did they impose 35 in your targets. And you say it's not a major effect, Eric.
Should I calculate it's about 1% of sales for 2013 and over 2% to the quarter and even 8% to 9% stay in the quarter. So, please me, are they actually correct 2013 organic sales growth and the correct three year status growth compared with the target and I get to 3.5 not 5 for the year, is that about right?
Okay. Thank you, James for your questions. Let me take the PS one first. If you look at the PS situation, we have clearly communicated in the conference call couple of weeks ago that we aim towards the 9% to 12% margin range that's what we said and that's what we will continue to work on. Now when you have a business where you have lower order intake and there you might have a negative development been positive to portfolio on the revenue side and then you need to manage your cost and we have done it very successfully in the past and we will take the right measures to manage the cost whether it's a third party cost, whether it's our own cost that's something that we have I think addressed very responsibly. I will not give you further guidance on concrete numbers for the PS situation, we cannot speak with what we said before, we aim to get as close as possible to 9% to 12% margin over the remainder of the turning cycle.
With that I turn over to Eric on the organic sales growth side.
Yes. Thank you for the question James. The 5.3% accumulated target for the first three years was a strategic planning period is on like-for-like basis, there the acquisitions are out and we are committed to report that with acquisitions out except for the very minor acquisitions. The 4% on base order growth in the fourth quarter includes effect of Power Systems that's the way we have reported – reported earlier this year and we stay with the same customer quarterly reporting. I'm sorry Power-One sorry, excuse me that is obviously Power-One and not Power Systems.
Unidentified Company Speaker
Okay. With that, I'm going to take one of the questions that we got in over the internet. It was from Nick from Blackstar Opportunities Fund. Is the 10% EPS growth forecast based upon your 2013 earnings base that includes and excludes the 260 win charge or is that based on something else? What is the base here?
The base for the EPS is the EPS of 2010 on the basic side and we have them for the first three years a 3% increase on the basic EPS. And the basic EPS includes everything that is the bottom-line you see there including all the charges whichever year you look at. We have also shown you in the same table a 6% CAGR on operational EPS. Operational EPS excludes the restructuring and some of the one-time charges that are below the line that start from a higher base in 2010 obviously because it is like-for-like comparison with the same definition, that is up by 6%.
Unidentified Company Speaker
Okay. We take a question here, Oliver and then Daniel? Valentino, can you give Daniel?
Olivier Esnou - Exane
It's Olivier Esnou, Exane. And three questions please. First one on Power Products it was never really a guidance official but you were sort of guiding last year about 14.5% to 15% EBITDA margin range quite precise for that division. Is that still valid going forward or actually do we get some improvements because of the pricing being not as bad as before, just your view on that. And secondly, the issue of how the large order translate into sales. And so, right now we have projects above $15 million of sales, which are about 12% of orders for 2013.
What you need for sales would be my second question can you help us assess the downward risk. And maybe the last question, when you answered previously on the guidance, you said you're going to update us in September now. What should lead you to be willing to wait until September, is there something specific you want to check out there before dating us I mean – because you could you have done it now basically so that's my first question. Thank you.
No, look - let me take the last question first on the September piece. We need to do homework to develop the long-term strategy of ABB that's a team effort and kind of take our time. At the moment there is no reason to be nervous about what we're doing at the moment. Developing the long-term strategy many years out for ABB, I want to do this together with the team and we're going to take the time we took the first quarter to build navigation check and get going, now we aim to mainly into focus area so we get the momentum going. And in parallel to that we are marking down strategy exercise and we plan to execute that plan in September.
On the Power Products, look on the Power Products guidance, the official guidance is 14% to 20% EBITDA margin and it's out of target that stays unchanged. Bernhard and his team have done an absolutely wonderful job over the last couple of years to navigate this business. Some of you were very nervous about price pressure, that was addressed very good execution, new technologies because it's not only cost cutting it's also new technologies that really help us to differentiate with the customers and I will not continue giving you a guidance on a 0.5%. Marching then with what we will do is we will work tremendously to keep the strong focus on Power Products and make it continuously a better business that means we want to grow it and we want to grow it profitably within the time that we have given.
Eric, you can take the large order please?
Yes. So, large orders, you're right everything above $50 million a large orders, it's about 12% in 2013. Given that it has been a higher share earlier, it is likely also higher share in sales but we are not tracking and communicating how big shall be our large orders in revenues. And I will say also on the targets, so if you may have – to the question on the targets. The targets remain the same, we set targets from 2011 to 2015 and that's why we are not changing those targets, that's the target that is set and what we do we guide you with a expectation but we will not. And what we're going to do in September is for period beyond the 2015. We will see exactly how far it will go but that's the new set of targets that is granted for the longer term. So for us it is a very clear logic and how we do it.
Sebastien Gruter - Societe Generale
Sebastien Gruter from Societe Generale. Two questions on the targets, and one question on the heat map. First question on target about their large orders that we understand that revenues from these large orders will go down next year this year in 2014. What's your plan for 2015, do you expect to catch up fully that decline or do you still see the large derivatives from the large orders being down in 2015 again.
Second question would be on the EPS growth target of 10% on the 10% CAGR. If I calculate you have – you forecast about 3%, 4% top line growth on average for 2014 and 2015. If I exclude the charge you have been searching that's about 15% CAGR expected for 2014 and 2015 at the EPS level.
So much in the gross at EPS line that had the top-line so some margin gains, I presume here. And I would like to know if it's like the revenues backend loaded towards 2015 is earnings, of course. And final question on the heat map could you share with us how much of the Group portfolio is green, yellow, red and grey and where do you want to be in five years time let's say.
Okay. I can start with the last one that's a very easy answer, no. But I can give you a clear hint, there is enough yellow and reds to keep us busy over the next couple of years. And that's all I'm going to say about it.
On the EPS growth, if you look at it we had 2012 and 2013 some special impacts as you know as you all aware, we have $2.14 a year and as I said in terms of revenue it will be a challenging year and 2015 we're going to be back at the growth trajectory and that means clearly back at the profitable growth trajectory. So your assumption that is more backend loaded probably you're correct. On the target, I'll let Eric comment; you want to do that one?
Yes. On the large orders?
Yes. So the large orders obviously are coming big chunks and it is not so that the large order in 2013 would generate revenues in 2014 necessarily, it all depends on the timing and the loading in the factories, a large cable order could be taken in 2013 for delivery in 2016 or 2017. So it all depends on how this backlog times out. But it is equally clear as you say that we expect to have more large orders in 2014 and that would be needed for the continual growth into the future. But it is not so predict and that's why I also will avoid to talking about how much revenues we have in large orders because it's extremely difficult to track that on a consolidated basis. Obviously order for order you can do it easily but on a consolidated basis that is meaningful to you to listen to.
Unidentified Company Speaker
One more here in the room before we take a call.
Hampus Engellau - Handelsbanken
Good evening. Handelsbanken, Hampus Engellau. Just very simple question, your growth targets for the service business, can you imagine you have given to your internal team a growth target, can you share with us more or less the range of set target?
No. No. The global vision that we have is to grow the service activities faster than the rest of the portfolio and we cannot speak to that. We have delivered on that the last couple of years if you look at the service growth in the last quarter, you see a really nice pick up and all the initiatives that Greg has mentioned that we have out there, the investments in sales people and the platform has really paid off nicely and we will continue to grow faster in service than the rest of the portfolio how much fast that we will not guide.
Hampus Engellau - Handelsbanken
All right. All right. You don't want to say that, okay. Thanks.
Unidentified Company Speaker
Okay. We take one from the webcast, the conference call.
Next question from the phone is from Ms. Daniela Costa, Goldman Sachs. Please go ahead.
Daniela Costa - Goldman Sachs
Thank you, good afternoon. Two questions, two quick questions. One, I noticed that you did a small acquisition on the building automation space, is that a lead into bigger ambitions in building automation just to know your view there and any still given there are some – some of your competitors are quite large in the field, how do you plan to expand there?
And then second, just wondering on your return side that's on the growth target, it came down this year, is that entirely due to the Power-One deal or to M&A in general, what would have been the trajectory where would you have been if you hadn't M&A this year would it have been -- have improved and by how much? Thank you.
Looks, I let Tarak answer the first question in a minute, just some comments in general. I showed before what ABB is really about. It's about power and automation for utilities infrastructure, utility industries and thread for a new infrastructure buildings is a part of infrastructure. And yes absolutely it has some automation space out there, we are already active in that and want to do more and Tarak will now comment a bit more on that one.
As Ulrich said, we have a building automation business. That's not that small and the acquisition of Newron allows us to really combine about actuation building automation business with software. We're combining hardware and software with Newron acquisition. We have to see how from a business model point of view, we operate in the building automation space as you said correctly. The big automation players are extremely big. At this point, we want to understand the market first, see how the hardware and software work together in a way that's a little bit different than the current solutions in the market today. And once we have some real results, we can probably come back with a clearer guidance especially in September about what our intensions are building automation space. Thanks.
Eric you want to take the CROI?
Yeah, I can take the CROI. So Daniela with regards to the CROI, it is correct that Power-One obviously waits a bit on the CROI. As you all know the CROI is very demanding definition because we add up all the money we have invested, we added back all the depreciation we have taken on those assets was basically all the cash that was going out the door for those investments on the asset side. And against that stands, the cash flow that were coming in so cash flow return on investment.
So the largest negative way on the CROI in 2013 is actually the negative cash flow in the Power Systems division. Power Systems was negative close to $200 million for year and if we would assume that would have been on a normal level that would have been quite an effect on the growth of CROI.
Unidentified Company Speaker
Okay. With that I take one of the Internet questions here from [indiscernible]. Good afternoon, given the short-term worries you mentioned about the growth outlook in 2014 i.e., the $3 billion lower order backlog the rather low book to bill, won't it be difficult to achieve any organic growth for the full year 2014 and even more so in U.S. dollars given the strong evaluation of many currencies in emerging markets. Does that not imply that ABB could well post a lower turnover in 2014 versus 2013, where consensus is still around 3% growth for 2014?
Okay. That's an interesting question, look we like difficult task and this team is good at taking them on. So we are fully committed to do our utmost to get the best possible revenue outcome for 2014. That was the first part in terms of the currency, Eric you want to take that things?
Yes. As I reported on 2013, we have a very small negative effect overall for 2013 on translation effects. When we roll that forward into 2014 even with the present currency rates we expect that not to be so significant and when we make the like-for-like comparison on the growth that we have discussed earlier during this call it is always done on the like-for-like also with the currencies.
So it could be that on the reported dollar number it will be impacted somewhat by the currencies but on the like-for-like it is on same currency level.
Unidentified Company Speaker
Let's take one from -- some from the room here.
Will Mackie - Berenberg
Good afternoon. Will Mackie from Berenberg. Two questions please, first of all sticking with the currency, we've talked a number of times about the translational effects. Could you walk us through the transactional exposures that ABB has cross border and how you can manage those in the years ahead?
And secondly, we've talked about the outlook across the power products business or Power Systems for large projects, perhaps you could throw a little color on to the prospects within the process automation that you highlighted some of the pressures around mining in the release. We've seen a number of majors in the oil industry cutting CapEx right out stream, how does that affect your outlook for that part of the business?
Let me take the second one first and then I'll hand over to Eric on the currency piece. Look on the process automation side, if you look at the markets that we are active -- ranging from pulp and paper over the marine part into the process industries and the metal part, and then in oil and gas side. When you meet with these customers out there its an interesting growth. On the aluminum side for example, the aluminum processing there is significant over capacity still out there, so you would not expect that has major investments coming.
If you look at the big miners they are cautious about the spending, if you look at the oil and gas part in terms of new large greenfield investment some of them have been more cautious. But the absolute amount of money that's still being spend every year is huge. So there is still a lot of opportunities for us to grow.
So, all together for Veli-Matti's business, I think hopefully on the process side we see a little bit more appetite to start spending money again. On the oil and gas side, this is something where the investments level are very, very high it come down a little bit, the absolute amounts are still attractive enough that we should be able to get the business going. But I'll let Veli-Matti may be make some comments on the market situation.
First of all, I have to confirm that the mining side is really the one which has been fairly low activity level over the last say six months. And I would be a bit surprised if it would change very quickly. Looking at what's going on in the mining companies though I think there is a little bit of sign that something will start to happen, but I guess that will be on the second half rather than the first half.
On the process side I would say that some positive signs in Asia for pulp and paper so those two industries seem to start to work again, and I would say it's not on a graphical paper, but its more on a hygienic part and the packaging part. So those two seem to be quite okay. Aluminum as always said the companies are prepared to invest so they have the plans in their draws, but I don't expect that to happen very quickly.
Marine which in our case has two main parts one is the offshore and one is the propulsion business, which is partly to LNG and partly to cruising business that has been pretty active. So I would say that we expect marine to continue to be on a high level. And as Ulrich said before upstream oil and gas is still very strong. There are some projects which has been delayed but on the other hand there is quite a lot of new exploration going on in new areas like Africa. We are very keen in looking at Mozambique, Tanzania other areas where we haven't traditionally been in so strongly.
So I would rely on oil and gas as the biggest segment followed by marine and then some better news for the mill centric industries from Asia.
Will Mackie - Berenberg
Eric you want to take the currency piece?
Yes. So on the transactional side, as I said in the presentation, we have basically fairly good natural edge. We have a lot of value added in the big emerging markets in China, in India, but also in many of the medium sized emerging markets. And on the European side, obviously we have some export out of Europe. We also have a lot of sourcing from lower cost areas in Eastern Europe also in Asian countries and that of course helps to lower the cost there.
We are also exporting out of India for instance where of course, we are taking benefit on the low cost selling that into other areas of the world. So that goes both directions, there are few countries Brazil is one example where we don't have as much footprint as we need compared to the moves of the currencies, so I will not say that there is no negative effect but overall it is not such a big effect in ABB. And obviously, we are hedging all the large transactions and also quite a bit of the standard product for quite extended period. So this is also coming step-by-step its not coming to a situation, which changes from a day to another.
Unidentified Company Speaker
Okay. So last call goes to the conference call.
The last question is from Mr. James Stettler from Barclays. Please go ahead sir.
James Stettler - Barclays
Yes. Good afternoon. Thank you for taking the question. Just longer term based on what we're seeing in power, so lower than expected demand, rising competition new entrance. Do you expect the way the power business to decline from the 46% level in 2013, can you also talk a bit about how big high voltage is within both Power Products and Power Systems able to get in 2013. And then finally, in terms of pricing how did pricing for base orders and power develop throughout 2013, can you see any trend there?
Long-term I lasted power business absolutely and I think there is a very bright future for it. If you look at development of the world over the next decades and what needs to happen on the power side its amazing. If you look at the difference the technology really can make to fulfill the ambitions on the power side, it's a great business to be in and I'm very, very happy to have it. We don't disclose details of BU level, so we have a good high voltage business, we love it but we will not talk about more details on that one in that context.
On the pricing side, look I know there is a little bit of nervousness historically around pricing I'm not nervous about that Bernhard and his team has delivered in an excellent way to compensate the pricing with new technology and cost dig out and that's quite a normal pattern in an industrial business that you have price pressure, if you're the market leader some other try to attack you. We will stay the course and we will manage the business as we have done successfully in the last year also in the future. We put a lot of money into technological innovation to stay ahead. Bernhard is continuously optimizing with his team, the footprint and he is driving that forward. [indiscernible] is going very well, if we manage continuously to have a good service journey that we have had in power so far I'm very optimistic about this business and its quality in ABB portfolio.
Unidentified Company Speaker
And with that I would like to close today's session. Thank you very much for joining us on the webcast here in Zurich. So have a great day and we'll see you in September in London.
Thank you very much.
Unidentified Company Speaker
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