REPORT ON EXPECTED DEVELOPMENTS

The International Monetary Fund (IMF) is forecasting that the global economy will expand by 3.4 % in real terms during the current year. The predicted increase in the industrialised nations is 2.1 %, with weaker growth of only 1.7 % expected in the euro zone. Economic development in Germany will be crucial, accompanied by continued recovery in France, Italy and Spain. In the emerging markets, the IMF expects real economic growth of 4.3 %, which will also improve KSB’s sales prospects in these countries.

However, the VDMA expects the mechanical engineering and plant engineering sector to struggle to benefit from this growth, forecasting that the industry will grow by a mere 1 % in real terms. Sales in pumps and systems, and in industrial valves, are actually expected to dip by 1 % in real terms in 2016.

SIGNIFICANT ORDER GROWTH WITH significantly WEAKER SALES REVENUE

In this environment, which remains difficult, we expect the Group’s order intake in 2016 to be significantly higher than during the reporting year, buoyed by several large-scale contracts.

In terms of consolidated sales revenue, however, we expect to see a significant decrease compared with 2015, based on the lower value of the project contracts in place and scheduled for delivery in 2016.

Pumps

In light of the strong price competition in the project business, combined with a decline in the number of contracts being awarded compared with previous years, we will be focusing during the current business period on promoting sales of our standard pumps. The main areas of growth appear to be industrial standardised and close-coupled pumps, among others. We offer these in combination with our energy-efficient synchronous reluctance motors and our improved variable speed systems, which help our customers to realise energy-saving potential. We also see good sales prospects for our modernised high-pressure and standardised chemical pumps, and for our updated range of pumps for use in heating and air-conditioning systems

We do not expect the market environment for the project business to start improving until 2017. However, the energy sector might prove to be a source of growth momentum during the current year. This particularly applies to China and India, where various contracts are about to be awarded. This could have a key impact on our order intake.

Against this background, we expect the segment to experience significant order growth, while sales revenue from pumps will be significantly down based on weaker order intake in 2015.

Valves

We are forecasting significantly lower growth in orders for our industrial valves. In countries such as Brazil and China, the market environment will be more difficult than in 2015. Specifically, demand from the petrochemicals industry and the oil and gas sector is likely to slow down further, with a corresponding impact on our order levels.

In contrast, we expect to see sales in large-scale butterfly valves pick up, these being the type of valve used in water pipelines for example. There are also signs of tangible growth in valves used in power plants, provided that our customers go ahead as planned with their announced large-scale projects, particularly in China and India. Any recovery on the market for liquefied gas transport is likely to be slow in 2016. However, our triple-offset butterfly valves for tankers are growing in popularity, pointing to the possibility of business growth. In addition, construction projects in the Middle East and Eastern Europe could result in moderate order growth for our valves used in building services.

Overall, therefore, we expect order intake for our valve business to be stable compared with 2015, while anticipating a substantial decline in sales revenue.

Gross domestic product growth
* Source: International Monetary Fund (January 2016)
** Source: European Commission (February 2016); additional information: euro zone + 1.6 % (2015), + 1.7 % (2016)

Service

From today’s perspective, demand for our service business will remain stable or expand slightly. To achieve our growth targets we will be making greater use of our sales channel aimed specifically at existing customers to offer our service range and related spare parts. As part of this process, we can also base our operations on the additional eleven service centres set up in ten countries in 2015, as well as on the new central spare parts warehouse in Europe.

To grow our business we will be continuing the planned expansion of our service centres, particularly in East and South-East Asia as well as in Eastern Europe.

However, a further considerable decline in the energy sector is to be expected in Germany and other European countries, as capacity in nuclear and fossil-fuelled power stations continues to be reduced. In mining, a second important pillar of our service business, there are not yet any signs of activity picking up again this year.

With regard to order intake, we expect the volume of new service orders in 2015 to moderately exceed the previous year’s figure. Based on the current situation, sales revenue is expected to grow just slightly.

BOARD OF MANAGEMENT’S SUMMARY OF EXPECTED DEVELOPMENT

For the current business period we anticipate, as detailed above, a significant improvement in order intake, driven primarily by major power plant projects in China and India. In contrast to the positive contributions from the Pumps and Service segments, orders received for valves will remain at prior-year levels. Sales revenue will, from today’s perspective, be significantly down on the previous year, as we expect the declines for pumps and valves referred to above and a slight improvement in the Service segment.

We will be significantly stepping up our measures for long-term improvements in our profit situation. These aim to reduce material, staff and other costs. This will also include continuing with our programme to redistribute tasks within our global manufacturing network. We are also creating the framework within which we can increasingly run our power plant engineering business in Asia, using mostly locally manufactured products. In addition, we are reducing the number of KSB companies and streamlining our product range. This means that one-off costs will considerably impact on our performance indicators. The precise amount of these one-off costs is difficult to forecast from today’s perspective as some measures are still in the evaluation or discussion phase. The operating result, in other words earnings before interest and taxes (EBIT) excluding the effects from measuring construction contracts under IAS 11 will be substantially down on the previous year depending on the level of one-off costs for efficiency enhancement measures. This applies to both the Pumps and Valves segments, while we are expecting to see but a moderate decline in the Service segment. Consequently, earnings before taxes (EBT) will be substantially down on the 2015 figure. This also means that our return on sales will be substantially lower.

Gross domestic product growth in the BRIC countries

Source: International Monetary Fund (January 2016)

With regard to the net financial position, we anticipate only a slight decrease compared with the € 211 million achieved in 2015. This is based on the expectation that the adverse impact on liquidity of the one-off costs to be borne in 2016 will not be felt until 2017 onwards.

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 2016 financial year. Material special factors beyond this period may result from our measures geared towards the long-term improvement of our profit situation, which will involve a reduction of material, staff and other 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