The review, which was communicated following ABB's Q3 results, was triggered by performance that has been volatile and below management expectations, despite significant investments made during the past three years. These investments have included product development, capacity expansions and acquisitions in software businesses to enhance our product portfolio.
The division is shifting its focus to higher-margin products, systems, services and software activities. It is closing low value-added EPC (engineering, procurement and construction) operations in more than 10 countries where project returns do not reflect the execution risks involved. To implement this new strategic focus, the division has made key leadership and organizational changes. It will continue to provide customers with a comprehensive system offering in projects that have a higher ABB content and the appropriate risk return profile.
“We’ve made substantial investments recently to increase Power Systems’ potential for value creation,” said Joe Hogan, ABB’s CEO. “However, Power Systems has not generated consistent returns. This is not acceptable; therefore we are recalibrating the growth, profitability and cash return ambitions for this division.”
As a result, ABB has raised the PS division’s 2011-2015 operational EBITDA margin target corridor to 9-12 percent from the current level of 7-11 percent, with the division expected to reach the lower end of the new corridor by the fourth quarter of 2013. At the same time, the organic revenue CAGR target has been lowered to 7-11 percent from 10-14 percent to reflect reduced low value-added EPC activities and increased project selectivity. ABB confirms all other 2015 targets.
These actions are expected to reduce EBIT reported by Power Systems and ABB in the fourth quarter by approximately $350 million. Of this, about $100 million is related to restructuring-related expenses and other non-operational write-offs, and is not included in operational EBITDA. The remainder reflects additional costs expected from closing some local units as well as further overruns on a small number of projects. The costs of the program are expected to have a payback period in the range of two and a half years.