Report on Expected Developments

For 2018, the International Monetary Fund expects global growth in real terms of 3.9 %. Accordingly, the dynamic performance of the past year will continue and perhaps accelerate slightly. In this context, the IMF and other institutions assume a synchronous economic development, which includes all key economic areas.

In the industrialised nations, economic development will continue at a comparable growth speed as in 2017 based on expected growth of 2.3 %. Companies in these nations can benefit from growing demand from emerging markets in addition to a good domestic economy. In the euro zone, which is of key significance for our business, the favourable financing options continue to bolster the economic upswing. According to IMF  figures, this should result in a gross domestic product that is higher by 2.2 %. Where this goes hand in hand with intensified investment activities, it will have a positive impact on the pumps and valves industry. Boosted by the tax reform, the growth signal in the USA is also green. Investment activities there will likely increase, which will create more favourable framework conditions for the local KSB companies.

The emerging market and developing countries are forecast to see slightly stronger momentum overall, which may result in an increase of 4.9 %. Economic prospects in the countries in Asia and Latin America that are key for our global business are promising. Economists expect 7.4 % GDP  growth in ­India. This goes hand in hand with the expectation that the economy will overcome the uncertainty caused by the cash and tax reform. Our strong local production base will also help us to benefit from the Make in India campaign . In China it is to be expected that the expansionary momentum will drop to 6.6 % due to the politically intended shift towards a service-driven and sustainable economy. This goes hand in hand with measures to stem the growth in debts. The country ­remains a key growth market for equipment goods such as pumps and valves despite the slight weakening.

Argentina, Brazil, Chile and Peru will also continue to benefit from the recovery of commodity prices, as will Russia. In ­particular for our companies in South America, opportunities are therefore increasing to expand their business with pumps, valves and support services. In Russia we can use a new assembly and servicing plant to serve the reviving market in the current financial year.

According to the assessment of the VDMA , the mechanical engineering sector will participate adequately in the global economic performance. Globally, the VDMA expects a real increase of 4 %; its forecast for the German mechanical engineering sector is only slightly weaker at 3.0 %.

As far as manufacturers of liquid pumps in Germany are concerned, the VDMA expects real sales revenue growth of 3 % in the current year; for industrial valves, the association expects an increase of 2 %.

PROSPECTS IN ORDER INTAKE AND SALES REVENUE

The announced continuation of global economic growth is creating good framework conditions for an expansion of our business in and outside Europe. Overall, we are expecting continued growth of our order intake in the current year. This will be based largely on the expansion of our business with standard products, support services and spare parts. In addition, the rising willingness of our customers to invest gives rise to expectations that they will increasingly also tackle major projects. For these, we can supply products tailored to project specifications in addition to standard pumps and valves. Overall, we expect a tangible increase both in order intake and sales revenue.

Gross domestic product growth

  * Source: International Monetary Fund (January 2018)
** Source: European Commission (February 2018);
     additional information: euro zone + 2.4 % (2017), + 2.2 % (2018)

Pumps

In the Pumps segment, we expect a strong increase in order intake; sales revenue is expected to grow tangibly. We expect the upward trend in industry and in water and waste water management to continue. To grow in these strategically paramount markets, we will optimise our product range and ­simultaneously intensify our activities to sell our renowned standard pumps for industrial and municipal water supply globally. To this end, we have expanded our production base and simplified the electronic selection and ordering of our standardised pumps. We also continue to focus on the support of major customers. Thanks to the breadth of our portfolio, which spans building services pumps through to specialised high-pressure pump sets, we can offer them comprehensive customer care.

Valves

As far as order intake for valves is concerned, we expect significant growth driven, in particular, by demand from industry. Above all customers in the oil and gas sector will make investments that they had postponed. At the same time, we expect to be able to use opportunities for the sale of pipeline valves in water transport and the construction industry in Asia to also offer sales opportunities.

By contrast, demand for liquefied gas valves for tankers and loading stations will likely not rise again until the end of the year. We expect a falling order intake trend in the energy sector, where we see hardly any business opportunities in the construction and upgrading of coal power plants, except in Asia. Sales revenue for valves will increase slightly from today’s perspective.

Service

In Service, we have set ourselves the target of strong growth for the coming years. 2018 will still see opposing effects, which result from the streamlining of our structures in Germany and France. We nevertheless expect a stable order intake for the current year, whereas sales revenue is likely to grow ­tangibly.

To this end, we will not least strengthen our valves service, for which we also entered into new framework agreements in 2017. We also intend to expand our range of engineering ­services. With a view to creating a closer-knit customer service network, we plan to establish new service centres in Southern and Eastern Europe, the Middle East, China and the USA. Relevant acquisitions are also being considered.

In addition, our service range is continuously adapted to ­accommodate the roll-out of new products. This includes, for instance, the creation of hygienic workstations for the main­tenance and repair of pumps for sterile processes. We aim to strengthen and expand the technical and organisational know-how of our specialists at a newly launched international service academy in 2018.

Gross domestic product growth in the BRIC countries

Source: International Monetary Fund (January 2018)

SUMMARY OF EXPECTED DEVELOPMENT

For the current business period, we expect, as outlined above, a tangible improvement in order intake. Major orders will contribute to this, among others in India, where we have expanded our capacities. We expect a strong increase in the Pumps segment. The development in the Valves segment will be slightly weaker, but we still expect a significant increase in order intake. For the Service segment, however, we expect a stable order intake.

We expect sales revenue, too, to rise tangibly overall. In this context, we expect significant growth in the Pumps and Service segments, and a slight rise in the Valves segment.

We will be continuing with our measures for long-term improvements in our profit situation, which were initiated in the previous years. These aim to reduce material, staff and overhead costs. We expect savings that will have a positive effect on future earnings. For 2018, we are planning consolidated earnings before interest and income taxes (EBIT) that should tangibly exceed the prior-year level. EBIT in the pumps segment is planned to rise substantially. In the Service segment, we expect significant increases, while we expect only a stable earnings contribution from the Valves segment. Among other factors, the one-off development costs for major power plant valves, for which we have already received orders, and the further delay in the recovery of the business with liquefied gas valves are weighing on performance.

In terms of earnings before income taxes (EBT) and the return on sales, our expectation is that both key indicators will increase strongly.

For the net financing position, we plan to achieve a value significantly above the previous year.

The forecast horizon for all the afore-mentioned measures is the 2018 financial year. Material special factors beyond this period may result from our measures geared towards the long-term improvement of our profit situation.

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.

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