REPORT ON EXPECTED DEVELOPMENTS

The world economy is expected to grow only slightly faster in the current year than in 2014. This is the opinion of the International Monetary Fund (IMF) in its outlook for 2015 published in October. We are basing our macroeconomic expectations on this forecast, as well as on the estimates of the German Engineering Federation (VDMA).

According to the IMF forecast, the global economy will grow by 3.5 % in real terms. The development of individual national economies, however, will vary greatly; also, according to the IMF, the risks too have increased, which we will discuss in the next section of the report.

For the common currency zone within the EU, which we consider our home market, the expected growth rate is just 1.3 %. In contrast to previous years, it will not just be the peripheral countries holding back growth. The economic heavyweights, Italy and France, too display weakness, which is likely to affect the demand for pumps, valves and service. According to the European Commission, the German economy, particularly important for our business, is expected to expand by 1.5 % this year. However, no significant growth contribution to our business can be expected from equipment investment.

The USA, which continues to be the world’s largest economy, is expected to grow by 3.6 %, thanks to the availability of inexpensive energy sources, which in turn favours the domestic industry. A higher demand for equipment goods can thus be expected.

Once again, a large percentage of global growth will be accounted for by the so-called emerging countries. For these emerging economies, in which we have been increasing our involvement for years, the IMF expects real growth of 4.3 %. This takes into account the continuing slowdown in economic expansion in China and the ongoing difficult conditions in Brazil and particularly Russia. In India, good growth can be expected due to the expected investment backlog. In Brazil, China and India, we can largely meet the demand using our local plants, and we are strengthening their performance in the global manufacturing network.

However, the IMF also warns of the risks to the global economy, including geopolitical crises, a possible overheating of the financial markets and the threat of stagnation in the euro zone. In this respect, the prognosis underlying our business expectations is fraught with many uncertainties.

If the world economy recovers as predicted, there will be wide-ranging opportunities for internationally oriented mechanical and plant engineering companies to expand their business. The German Engineering Federation (VDMA), for example, forecasts that global sales revenue for machinery will increase by 5 % in real terms. VDMA economists expect production growth of 2 % for German mechanical and plant engineering companies.

As in 2014, however, the VDMA has lower expectations for the pumps business than for mechanical engineering products in general. Thus, the Engineering Federation expects the sales revenue of German manufacturers of liquid pumps to stagnate. Sales revenue for industrial valves, however, which recently has been declining, is expected to increase by 2 %.

ORDER AND SALES GROWTH PLANNED

Based on the general economic forecast, the expectations of the industry and our own assessment of the market, which overall is positive, we plan to increase the Group’s order intake significantly. We expect not only economic impetus to contribute to this, but also the introduction of technically improved products, our sales initiatives and the use of new service locations.

Fitting out a large power plant in China with newly developed pumps should contribute significantly to the planned increase in order intake. In 2015, we expect growth in all three segments: Pumps, Valves and Service.

Our consolidated sales revenue is planned to improve and more than compensate for the decline in 2014. In this context, we expect Pumps and Valves to grow markedly, and Service business to increase slightly.

Pumps

In the current year, we aim to expand the Pumps business. We believe that we can achieve a significantly higher order intake and sales revenue for Pumps than in 2014.

To this end, we can draw on a modernised range of standardised and close-coupled pumps whose regional manufacture meets the procurement needs of many customers. We now also offer purchasers of our products a wider range of high-pressure ring-section pumps, hygienic and sterile process pumps, as well as circulators.

We expect growth impetus from the general and chemical industries as well as from the food and beverage industry. At the same time, our process pumps, which have been adapted to the API  standard, improve our prospects of winning offshore plant equipment orders. As a full-liner for pumps in building services, we aim to broaden our customer base of dealers, distributors and installation contractors.

The legal requirements for the use of efficient drives in Europe, China and the United States also suggest to us that customers in those countries will demand more energy-efficient IE3  and IE4  class motors. We are responding to this foreseeable development by increasingly offering high-efficiency drives instead of asynchronous motors for pumps used in industry, water engineering and building services. We offer our magnet-less synchronous reluctance motors , independently of the pump business, for other rotating machinery as well.

In line with the needs of China’s power industry, which has 60 new nuclear power plants planned or already under construction, we will offer an advanced reactor coolant pump, which we are testing in Shanghai.

Valves from Jundiaí: Employees of Brazilian KSB Válvulas Ltda. assemble ball valves.

Valves

With our range of globe, gate and butterfly valves, we want to take advantage of the business opportunities offered by the valve market for growth. It has a larger overall demand volume than the pump market, but is more differentiated in terms of competition. This financial year, too, we will focus less on the mass market and more on those applications that require sophisticated technology. We are aiming to significantly increase our order intake and our sales revenue with this product group in comparison with 2014.

We remain well prepared with our range of valves, which are used in the manufacture and transport of liquefied gas. Around 60 % of all LNG  tankers used in the world are fitted with KSB valves; we accordingly expect to benefit from an increasing demand for them.

In water transport, many pipelines are already equipped with up to 4-m-large butterfly valves manufactured at our production facility in Burgos (Spain). For water pipes with smaller diameters of up to 1.4 m, we have now supplemented our range with a butterfly valve that also serves as a check valve. This dual function suggests that the product will be popular with many customers.

We expect improved business also resulting from the new ANSI standard power station valves required by customers primarily for plants in China, India and the United States. Our expanded range is a response to the decreased demand in Europe for power engineering valves that meet the DIN  standard. In addition, we are adapting our product range to suit plant-specific alterations, and now offer a power station gate valve for high pressures and temperatures. This is designed for a new type of power station that works more efficiently than previous coal-fired plants and issues fewer CO² emissions.

Service

We intend to moderately expand our service business in terms of order intake and sales revenue. In this context, we are making the most of the opportunities opened up to us in major retrofit  projects. In France, such projects also cover several nuclear power plants. To compensate for the decline in orders in the German market, we have expanded our range of services for these plants.

We want the sites where we set up new service centres in 2014 to generate additional business for us in 2015. This applies in particular to the support centres opened in the mining regions, which are intended to offer services and spare parts to mine operators. In Asia, we see a slight increase in demand for professional service for systems incorporating pumps and valves, which we will also take advantage of.

The order situation in the German energy sector will remain difficult, as it continues to be in a state of transformation. The volume of modernisation and maintenance projects will also be much lower in 2015 than before the turnaround in German energy policy (“Energiewende”).

After the construction of a new spare parts logistics centre, planned for the current year, we will be able to accelerate the supply of replacement components from European manufacture to our customers. This is expected to have a positive impact on our business. The same applies to the facility completed in 2014 in Pegnitz for the environmentally safe dismantling of chemically contaminated pumps in Germany.

OUTLOOK FOR THE GROUP AND FOR THE REGIONS

In the Regions Middle East / Africa, Asia and Americas / Oceania we expect our local companies to record a moderate to significant increase in order intake. We also expect a slight improvement in the number of orders received by our European companies. Here, our plans include the above-mentioned major power plant engineering contract.

Global power plant equipment: In future, KSB will manufacture boiler feed pumps not only in Germany but also in China and India.

We aim to increase our sales revenue in all Regions, although the growth rates are set to vary widely. Some of the growth will draw on project business orders received in 2014 or earlier.

However, the eventualities and contingencies outlined in the subsequent opportunities and risks report must be taken into account, especially for order intake.

Gross domestic product growth
*
Source: International Monetary Fund (January 2015)
**
Source: European Commission (February 2015); additional information: euro zone + 0.8 % (2014), + 1.3 % (2015)

Europe

Growth in the key sectors for our business will remain low in Europe, which in turn limits the demand for pumps and valves for new installations. For this reason, we want to concentrate more on the needs of operators who already use our products, supplying them with services, spare parts and new products. We are also using our business options in the general and project business. Overall, it can be expected that the volume of orders received by our European Group companies and their sales revenue will noticeably increase this year.

At KSB AG, we aim to take advantage of the potential of the overall slightly growing market with increased sales efforts and technically revised products. A strong presence at trade shows for industrial applications, building services and water engineering will help with this. We have also started to partly realign our production and thus improve our cost position. This applies in particular to coolant and boiler feed pumps, submersible borehole pumps and cast components from our own plants.

KSB S.A.S. sees the market remaining difficult in France during the current year, but still believes there are good export opportunities for its cryogenic valves. As it expects increasing demand for such special valves for extremely low or very high temperatures, it is building a new production facility in the west of France.

Middle East / Africa

The projected growth in the Region Middle East / Africa will have a positive impact in the current year on the business of our local subsidiaries, with both their order intake and sales revenue expected to increase significantly. In principle, the chemical and petrochemical industries, construction / building services and transportation sectors all offer good growth prospects. However, a permanently lower crude oil price in the producing countries may lead to planned projects being postponed.

Individual KSB companies in other Regions which also export to this market with the support of our local staff can also benefit from positive investment decisions. The economic outlook remains uncertain in the Region due to the numerous political and military crises. Our business in the Region can be affected by all these problems, depending on how they develop. First and foremost, therefore, we are focusing our activities on those markets in which no critical developments are forecast.

Asia

The markets in Asia continue to offer good business opportunities, which we plan to exploit with our own sales and manufacturing companies in China, India, South Korea, Taiwan and a number of South-East Asian countries. We expect the order intake and sales revenue of these companies to increase significantly in 2015.

In 2015, we will implement measures to increase the amount of locally produced products supplied to planned power plants in China and India. Other important areas of application for our pumps and valves in Asia are industry, water and waste water management, and marine applications.

To make more of the market opportunities in China, we have started to restructure our activities there. We want to implement our new sales system in the country, make more efficient use of local manufacturing facilities and promote customer loyalty through improved services.

In the region’s second major market, India, public infrastructure projects and private projects may stimulate the demand for our products. We expect our customers to start ordering components for new coal-fired power plants again in the second half of the year. Industrial companies, after a long period of modest investment, are also expected to place more orders.

In South-East Asia, where we have subsidiaries in Indonesia, Singapore, Thailand and Vietnam, orders for capital goods will continue to pick up. In this area, we see a positive trend towards more environmental protection and lower resource consumption. This should lead to public and private companies increasingly ordering products that will make business more sustainable.

Americas / Oceania

Our aim for our companies in the Americas and Australia in 2015 is to achieve marked growth in order intake and sales revenue.

According to current projections, our subsidiary with the largest sales revenue in North America, GIW Industries, Inc., with its range of slurry pumps, will not see a revival in mining until at least the end of the year. In Canada, the US and Mexico, we are also focusing our sales activities on industry, including petrochemicals, as well as on the energy, water and waste water industries. In these sectors, we offer not only pumps and valves but also engineering services. We plan to expand our service business in North America, which up until now has not been universally available.

In South America, projects that have long been postponed in the water, waste water and energy sectors could be awarded, resulting in corresponding order opportunities for our companies there. In addition, a KSB company in Colombia will commence operating and open up this market for us. However, the poor economic development expected in Brazil will limit the potential for growth in this country.

This also applies to Australia, where the continuing weakness of the economy is complicating the planned recovery of our business. We have focused our efforts on the mining, energy, water and waste water industries, as the country’s industrial sector continues to shrink.

BOARD OF MANAGEMENT’S SUMMARY OF EXPECTED DEVELOPMENT

Despite the economic uncertainties, we see good prospects for improving our business volumes and earnings in all three segments in this period. We will make intensive use of the current year to realise the described increases in order intake and sales revenue, as well as to increase our consolidated earnings before income taxes (EBT). We have also begun to review our strategic priorities and to adjust them as part of a strategy update in response to altered market conditions.

The fact that we will focus a significant portion of our sales and marketing activities on defined areas will contribute to the desired growth. We see the new sales structure as being appropriate for serving customers worldwide quickly and individually. At the same time, we aim to increase the attractiveness of our portfolio for customers with products that we will present at the major trade shows of the year.

Gross domestic product growth in the BRIC countries

Source: International Monetary Fund (January 2015)

One important task in 2015 is to increase our global competitiveness by improving our cost base. We hope to achieve this by implementing the restructuring measures adopted and introduced in 2014. In addition, we will take steps in the current year to reduce the complexity of our product range, to restructure production areas, and to review the profitability and strategic relevance of our companies.

For the Pump segment, we expect both order intake and sales revenue to tangibly increase compared with 2014. It is anticipated that earnings before interest and taxes (EBIT) will be significantly above the prior-year figures, despite the difficult sales revenue situation that still prevails in project business. In the Valves segment, we are striving to achieve marked growth in order intake and EBIT, as well as a significant increase in sales revenue compared with 2014. In Service, we aim to see each volume indicator grow moderately, and to significantly increase EBIT in this segment.

For the Group as a whole, we expect order intake and sales revenue to increase significantly compared with 2014. Consolidated earnings before income taxes (EBT), too, are to improve significantly, and to once again approach a three-digit million euro amount. Accordingly, the return on sales before income tax is expected to increase to a value in the medium single-digit percentage range. We expect the net financial position to remain almost unchanged at € 180 to 190 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 2015 financial year. We are not aware of other important influences that extend beyond this period.

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.

Retrofitting instead of new products: Tailored components are created using CAD tools in order to modernise pumps.
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