Annual Report 2016
Menu

REPORT ON EXPECTED DEVELOPMENTS

The International Monetary Fund (IMF) expects real growth of 3.4 % for the current year. The UN organisation is forecasting a 1.9 % increase in growth in the industrialised nations. The continuation of an expansionist monetary policy may contribute to this. However, the favourable basic financial parameters are being countered by both the structural problems referred to above and also by new political uncertainties. The latter include protectionist tendencies in some of the markets relevant to our business. Growth in the euro zone is expected to remain more or less unchanged.

With regard to the emerging markets and developing countries, the IMF is forecasting growth of 4.5 % in real terms despite a slight slowing of growth in China again. In contrast, in India, Asia’s second-largest market, structural reforms are intended to improve overall economic development. In Latin America, including Brazil, which is an important production base for us, the situation can be expected to change for the better, if commodity prices recover. A normalisation of oil and gas prices would be expected to generate a positive development in the Arab producing countries too.

The German Engineering Federation (VDMA) believes that the benefits of this global economic development will be below average for the mechanical engineering sector. Globally, the VDMA expects to see a real increase of just 2 %, but its forecast for the German mechanical engineering sector is even more pessimistic, at a mere +1 %. This forecast is based on such factors as the weakness of some “raw material-related areas” and unresolved geopolitical crises, but also the afore-mentioned protectionist trends.

As far as producers of liquid pumps in Germany are concerned, the VDMA is expecting sales revenue to stagnate during the current year. With regard to industrial valves, the Association is even forecasting a 3 % drop in sales.

SIGNIFICANT GROWTH IN ORDER INTAKE, SALES REVENUE MORE OR LESS STABLE

In light of this economic outlook, we are planning on the basis that our order intake will only rise slightly in the current year, with sales revenue set to remain more or less stable. We primarily expect to see our business in standard products, service and spare parts pick up. Ultimately, a key factor in order intake will be whether and to what extent project business recovers again and whether we can win new projects from potential customers on the basis of our technical expertise and our pricing.

Pumps

We expect to see a significant increase in demand for centrifugal pumps of the kind we primarily produce and sell. This is likely to be supported by growth in the water and waste water market and by investment activity in the chemicals and petrochemicals industry gradually picking up speed again. New petrochemical projects, as well as projects in relation to water and waste water engineering are expected, for example, on the markets in Saudi Arabia and Iran, if oil prices rise again. Further major waste water projects are at the planning stage in East Asia, North America and North Africa.

Generally speaking, the trend towards energy-efficient solutions is one factor that could lend impetus to our business with automation equipment and energy-saving motors. This is particularly true of building services in Germany, where the “National Energy Efficiency Action Plan” calls for solutions to reduce electricity consumption. We are expecting to see increased demand for our high-efficiency circulator pumps in particular.

In the manufacturing sector, the indicators point to only slight growth. In mining, further improvements in order intake are anticipated for 2017.

The situation with regard to conventional energy generation, however, remains as difficult as ever.

Overall, we expect the Pumps segment to experience significant growth in order intake and a significant decline in sales revenue.

Gross Domestic product growth

Valves

In the Valves segment we are also expecting the keen level of demand from the water and waste water industry to continue. This relates to the construction of new plants and to replacement investments designed to secure existing infrastructure. The main areas of demand are Asia and the Middle East, as well as North America. Given the favourable market environment in the construction sector, we are expecting to see the order situation for butterfly valves, globe valves and gate valves used in building services change for the better.

Should oil and gas prices return to normal, a slightly higher level of demand for valves can be expected from the petrochemicals sector. There is also the likelihood of a slight increase in other industrial sectors, including chemicals.

In the energy supply sector, in contrast, we do not yet see any sign of a sustainable market recovery. We are expecting prices for power plant valves to remain under pressure.

Based on the sales momentum described, as well as technical innovations and sales initiatives for the global expansion of our valves business, we look set to achieve a significant increase in orders, with a slight rise in sales revenue.

Service

In the Service segment, we are continuing to expand our infrastructure, focusing on China, India and the USA. By setting up new bases in proximity to key industrial centres, we are working to partially offset the decline in service business for nuclear power plants, primarily in Germany. We are expecting to see considerable order intake from our new service centres, which were set up in Abu Dhabi, Australia, Indonesia, Canada, Malaysia, Mexico, Saudi Arabia and Turkey in 2016. We also foresee good growth prospects for our business in India, where we have realigned our service organisation and extended our range of services, and are aiming to achieve above-average growth during the current year.

In addition, we are anticipating increased interest in the current year in our service to check and improve the energy efficiency of pump systems. This is particularly relevant to customers from industry and local authorities who are looking for ways to cut costs.

Given the ongoing difficulties in the oil and gas industries, demand for service from this sector will remain muted at first. Similarly, we are not expecting any increase in orders from the energy sector in 2017, with service frequently being kept to a minimum. As Germany gradually withdraws from nuclear energy, orders from operators of nuclear power plants are also set to fall further.

Consequently, we are only expecting to see a slight increase in order volume and stable sales revenue in the Service segment in 2017. It is still difficult to predict how order intake will develop in the Middle East, with the level of new orders influenced by the political crises in this region of the world.

Gross Domestic product growth in the bric countries

BOARD OF MANAGEMENT’S SUMMARY OF EXPECTED DEVELOPMENT

For the current business period we anticipate, as detailed above, a marked improvement in order intake, driven primarily by an upturn in our business with standard products, spare parts and service support. As already mentioned, we expect all segments to make a positive contribution, with Pumps and Valves recording a larger increase in percentage terms than Service. The negative impact from the measurement of construction contracts under IAS 11 on sales revenue is expected to be significantly lower. Accordingly, sales revenue will be more or less stable from today’s perspective. Significant falls in the pumps business are likely to be offset by a slight rise in valves. We are planning for stable sales revenue in our Service segment. We will be continuing as before with our measures for long-term improvements in our profit situation. These aim to reduce material, staff and overhead costs. As part of this approach we will be looking to drive forward with our programme to redistribute tasks within our global manufacturing network. We will also be creating the basis for further reductions in the number of KSB companies and for streamlining our product range. Consequently, earnings figures will again be burdened by one-off costs in the current year, with around € 50 million forecast worldwide. However, in 2017 we will already be seeing further positive effects from our cost-cutting programmes (worldwide, at a comparable level to 2016). We are therefore planning on a segment result, in other words earnings before interest and taxes (EBIT) excluding the effects from measuring construction contracts under IAS 11 that, depending on the level of one-off costs for efficiency improvement measures, should be well above the previous year’s figure. We are expecting substantial growth from Valves and Service, and significant increases in Pumps to contribute to this. Based on what is likely to be a less negative impact from measuring construction contracts under IAS 11, earnings before taxes (EBT) will also be well up on 2016 levels. As a consequence, our return on sales would improve substantially.

With regard to our net financial position, we are anticipating a figure of between € 240 and 260 million.

The forecast period for the above figures and information, which we have drawn up taking into account the opportunities and risks presented below, covers the 2017 financial year. Material special factors beyond this period may result from our measures geared towards the long-term improvement of our profit situation, which are aimed at reducing material, staff and overhead costs.

Forward-looking Statements

This report contains forward-looking statements and information that are based upon the assumptions of Management. They express our current forecasts and expectations with regard to future events. As a result, these forward-looking statements and information are exposed to risks and uncertainties that lie outside the Management’s sphere of influence. We wish to point out that actual events or results may differ materially from the forward-looking statements and information mentioned, if one or more of the following opportunities or risks, or other opportunities, risks and uncertainties should materialise, or if the assumptions underlying the statements prove to be inaccurate.

To top