Annual Report 2016
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Business Development and Results of Operations

In the 2016 financial year, we focused to a greater extent than before on meeting the needs of those customers who are already using our products. The strategy of offering these customers our services, replacement pump sets, and additional pumps and valves proved very successful. In addition, we focused on sales of our standard products, developing new distribution concepts specifically for our successful Eta industrial pump series.

The situation with regard to project business remained difficult, with fierce pricing competition continuing to affect orders to fit out power plants and petrochemical facilities. Consequently, we continued to shift our power plant pump activities to Asia in order to be closer to our customers and also to cut our manufacturing costs. In the oil and gas sector, and in petrochemicals, we took advantage of our global production network in order to be able to bid at the prices demanded by the market. Nevertheless, the number of new projects was very limited for the reasons outlined above.

In order to bring our cost structure into line with the changed market conditions, we launched our efficiency improvement programme in 2016. This programme is designed to cover a three-year period, during which time we will use a variety of global and regional measures to make cuts of around € 200 million overall to our material, staff and overhead costs. Key focuses of this programme include a reduction in our production sites and the merger of smaller companies. As far as purchasing is concerned, we will be using dedicated supplier events and online auctions to help to reduce our material costs. The reduction in staffing levels also associated with 1,300 different measures will be carried out in a socially responsible manner. With this in mind, we have rescheduled the end date of some measures to beyond the target year of 2018.

As predicted, the restructuring costs associated with the programme and additional one-off costs had a negative impact on profit performance in the year under review. For the Group, this amounted to around € 50 million, while worldwide savings were broadly similar in amount. Order intake and sales revenue remained down on prior-year levels.

Order intake

At € 2,156.6 million, the KSB Group’s volume of incoming orders was down € 104.6 million on 2015. We had begun the year still expecting to see a clear improvement in order intake, anticipating several large-scale assignments in the power plant sector. However, the decisions on the award of these contracts were delayed.

The 4.6 % decrease can be attributed to weak levels of demand in key customer segments, in particular the energy industry, but is also due to significant negative currency exchange effects. The conversion to our Group currency, the euro, resulted in reductions of around € 51 million. Fluctuations in the exchange rates between the euro and the Argentine peso, the Chinese yuan and the South African rand had a particularly strong impact.

Developments in Europe (‒ 5.2 %) and Americas / Oceania (‒ 8.4%) were primarily responsible for the decline in orders received, although the companies in the Region Middle East / Africa also faced a downward trend (‒ 3.0%). In Asia (+ 0.5 %), order intake was on a par with the previous year overall. Order levels posted by KSB Aktiengesellschaft, at ‒ 3.7 %, held up more strongly than in the Group as a whole. Our German parent company recorded new orders totalling € 751.8 million, a figure boosted by an increase in orders from existing customers for service support, spare parts and new products.

Pumps

Order intake in the Pumps segment, totalling € 1,386.6 million, was down € 65.8 million on the previous year and therefore did not grow “significantly” as expected. The year-on-year change, at ‒ 4.5 %, more or less corresponded to the overall development of new orders received by the Group. The difficult situation in the Middle East, economic problems in Brazil and Russia, and a change in the focus of government investments in China all contributed to the decline in pump orders.

Overall, the order situation in relation to pumps for the mining sector improved on the previous year, reacting to the signs of recovery mentioned above. However, the decline in orders received by our companies from the energy, chemicals / petrochemicals and transport sectors was sharper, and overall more significant to our business.

The sale of pumps to the construction industry in Europe was one specific area that developed positively. In addition to increased sales in circulator pumps, new compact lifting units also contributed to this upward development. In India, above all the level of new orders from the water industry was gratifying. Having revamped our range of well pumps, we saw the first signs of sales success in this field.

Valves

In the Valves segment, orders received in 2016 totalled € 331.2 million. Rather than stagnating, as expected, this meant that order intake fell by € 36.8 million or 10.0 %.

The key factor responsible for this decline was the renewed drop in demand for cryogenic valves that we supply worldwide for liquefied gas tankers and terminals. In light of the difficulties facing the oil and gas industry, shipping companies were being exceptionally cautious with regard to any plans to modernise or expand their fleets of tankers. Like the Pumps segment, the Valves business also reflected that the energy industry was holding back from the construction of new installations and thus from placing any purchase orders. This reticence impacted on new orders for high-pressure globe, gate and butterfly valves. With production capacity frequently being under-utilised, industry, in particular chemicals and petrochemicals, was another sector that did little to stimulate demand.

In contrast, business with pipeline valves for use in water supply systems developed very positively. Indeed, we expanded our market share in this sector, helped not least by our introduction of butterfly valves with diameters of up to 2 metres capable of withstanding pressures of up to 40 bar in either flow direction. In the construction sector, orders for our valves continued to be supported by the construction boom, itself triggered by low interest rates, and our sales figures were able to grow.

Service

In our Service segment, we failed to achieve the predicted “moderate” growth, with an order intake of € 438.8 million. Total orders for service support and related spare parts were € 2.0 million or 0.5 % down on the previous year.

We recorded positive growth rates through our service business in East and South-East Asia, particularly China and Indonesia, and in the Region Middle East / Africa. In Europe, our traditionally strong service business in Germany continued to be impaired by the shut-down of nuclear power plants. Growing business in mobile valve service for industrial customers partially offset this negative trend. Overall, however, the companies in Germany recorded a clearly negative figure. In contrast, French service business posted a positive performance, also buoyed by framework agreements with large companies.

In the Americas, the value of our service orders was down on the previous year, not least due to the continued decline in the mining sector. In South America, business in Argentina in particular developed very positively. This is not reflected in the Group’s order intake figures, however, due to the change in the peso/euro exchange rate.

SALES REVENUE

Consolidated sales revenue fell strongly year on year, totalling € 2,165.7 million. This represents a decrease of € 169.2 million or 7.2 % compared with 2015. We had been expecting to see a “significant” decline in the figures. € 49 million of the decrease can be attributed to changes in exchange rates. Their impact reduced the sales revenue figures reported by several companies after the conversion into the Group currency, the euro. We recorded falling sales revenue across all regions: Europe (– 7.4 %), Middle East / Africa (– 2.5 %), Asia (– 4.8 %) and Americas / Oceania (– 10.8 %). In Europe, KSB AG generated sales revenue of € 760.6 million, which equates to a decrease of 7.7 %.

2.17billion
 Consolidated sales revenue in 2016

Pumps

In our Pumps segment, in which we once again achieved around two thirds of consolidated sales revenue in 2016, there was, as expected, a significant decline in sales revenue, down by € 85.5 million to € 1,428.5 million. This represents a decrease of 5.6 %. All four regions were affected. Waning 60 demand in earlier years for feed pumps for fossil-fuelled power plants had a particularly strong impact. However, the lull that has been in evidence in the oil and gas industry, as well as in mining, for several years now, with negative fall-out for other sectors, has long been hampering investment to the extent that there were fewer pump orders for large-scale projects during the past financial year.

Valves

Similarly to order intake development, our Valves segment experienced the strongest decline in sales revenue in percentage terms. Sales revenue for globe valves, gate valves, butterfly valves and other valve types fell significantly (and not “substantially” as expected), down by € 23.8 million or 6.2 % to € 360.8 million. The decline in orders was particularly marked in the case of butterfly and diaphragm valves. In China and South Korea, weaker demand for butterfly valves in the marine sector was the main factor impacting on sales revenue.

Service

Sales revenue in our Service segment, at € 416.5 million, almost matched the previous year with, as anticipated, a slight increase of € 2.9 million (+ 0.7 %). This meant that we slightly exceeded the prior-year level in our most important market, namely Europe. In addition, our companies in the Region Middle East / Africa reported strong increases. This growth was, however, offset by the market-driven downward movement in the Americas and in some Asian countries. In China, where we actually recorded above-average growth, a major focus was on the modernisation of power plants.

Sales revenue by segment

EARNINGS BEFORE INTEREST AND TAXES (EBIT)

The KSB Group achieved earnings before interest and taxes (EBIT), excluding the effects from measuring construction contracts in accordance with IAS 11, of € 102.9 million (previous year: € 101.9 million). The Pumps segment contributed EBIT of € 60.9 million (previous year: € 55.4 million). This means that the forecast (of a substantial decline) made in the previous year’s report did not materialise. As predicted, EBIT fell substantially in the Valves segment, totalling € 8.8 million (previous year: € 10.3 million). EBIT for the Service segment also declined substantially (and not moderately, as planned) to € 33.3 million (previous year: € 36.2 million). The reconciliation effect from the measurement of construction contracts under IAS 11 to EBIT changed by € – 18.1 million year on year.

TOTAL OUTPUT OF OPERATIONS

The above-mentioned decrease in sales revenue is also reflected in a lower total output of operations, totalling € 2,174.2 million compared with € 2,350.3 million in the previous year. Work in progress and inventories of finished goods increased by € 2.9 million, and thus by € 7.8 million less than in the previous year. In contrast, other work performed and capitalised rose by € 0.9 million.

INCOME AND EXPENSES

Other income declined from € 50.0 million to € 47.2 million, partly due to lower income from the reversal of provisions no longer required.

The cost of materials fell by 10.8 % and thus more strongly than total output of operations. In percentage terms, the cost of materials (€ 874.2 million) decreased from 41.7 % in the previous year to 40.2 % in the year under review. This can also be attributed to first successes of our efficiency improvement programme.

Staff costs fell by 2.5 % to € 798.8 million. In relation to total output of operations, however, this represented an increase of 1.8 percentage points. Key factors were a lower number of employees on the one hand, and collectively agreed salary increases on the other. Compared with 2015, the number of employees fell by 624, taking the total figure at the end of the reporting year to 15,572. The European companies reported the biggest fall with a reduction of 321 staff, 160 of whom had been employed at the Group’s German sites. Employee numbers were also markedly down in the Americas with 157 fewer people working for KSB on the reporting date compared with the end of December 2015. This development is the result of measures introduced to bring our cost structures into line with new market conditions. The KSB Group employed on average 401 fewer people than in the previous year. Based on the significantly lower total output of operations and simultaneous decrease in the number of employees, the average output per employee fell from € 144 thousand in the previous financial year to € 137 thousand.

The ratio of other expenses to total output of operations fell from 17.5 % to 17.1 %. In absolute terms, this means a change from € 411.5 million to € 372.4 million, attributable to falling sales costs, lower administrative expenses and a lower level of third-party services.

Financial income / expense deteriorated by € 5.1 million. This is primarily a reflection of the lower income from investments accounted for using the equity method. Based on the contribution to income from our Chinese joint venture included in this item, we reported expenses totalling € 1.3 million. This compares with income of € 4.4 million in the previous year.

EARNINGS

The KSB Group generated earnings before income taxes (EBT) of € 74.6 million, compared with € 93.4 million in 2015. This means that the previous year’s forecast of a substantial fall in earnings due to one-off costs was accurate. Correspondingly, the return on sales before tax decreased from 4.0 % in the previous year to 3.5 %, also confirming our expectations outlined in the previous year. The income tax rate was down, due to such factors as the reduced scope of non-tax-effective impairments on goodwill. The rate was 36.0 %, compared with 44.1 % in 2015. Earnings after income taxes, at € 47.8 million (previous year: € 52.2 million) were down 8.4 % and therefore did not fall as sharply as earnings before income taxes (EBT) (20.1 %).

74.6million
 Consolidated earnings (EBT) in 2016

Earnings attributable to non-controlling interests were up from € 12.9 million to € 14.9 million. This can be attributed to improved contributions to earnings from our Asian companies. Relative to earnings after income taxes, there was therefore a change from 24.7 % to 31.0 %.

The earnings attributable to shareholders of KSB AG (€ 32.9 million) were € 6.4 million lower than in the previous year (€ 39.3 million).

Earnings per ordinary share were € 18.68, compared with € 22.30 in the previous year, and € 18.94 per preference share, compared with € 22.56 in 2015.

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