REPORT ON EXPECTED DEVELOPMENTS

  • Overall state of the economy holds many uncertainties
  • Growth opportunities for order intake and sales revenue in all segments
  • Consolidated earnings in 2012 expected to exceed prior-year levels

MARKET DEVELOPMENT AND SALES OPPORTUNITIES

The outlook for the global economy deteriorated in the second half of last year. Leading forecasters expect growth in the world economy to be significantly lower in 2012 than in the previous year.

The debt crisis has increased economic risks in the European countries in particular. Should the public finances in these countries worsen, this trend will also indirectly affect export-oriented non-European countries such as China.

The restrictive monetary policies introduced by most emerging economies to combat inflation will render them unable to maintain the same growth momentum as in 2011. In addition, budgetary problems mean that comprehensive ­programmes to stimulate economic growth in weaker economies are ­unlikely to be implemented.

GROSS DOMESTIC PRODUCT GROWTH (WORLD)

In the current year and in 2013 we expect to see generally moderate growth in the market, with regional variations. A relapse into recession is possible, particularly in Europe.

  • Pumps

Should no economic downturn take place in 2012, we foresee a further increase in orders for standard pumps, based on industrial investment and construction activities. The growth rate, however, is unlikely to be as high as in the previous year due to current economic developments. However, our general business sales initiatives could provide an additional boost to standard pump business in selected countries. In addition, we will begin introducing an improved standardised chemical pump in the current year. It will initially be manufactured at two sites in 2012, and from 2013 at three sites on different continents.

The order situation for high-pressure pumps, chiefly used in power plant processes, is expected to remain difficult. It is unclear whether the growing worldwide demand for electrical power can overcome the investment backlog. Countries such as China and India will have no choice but to build additional power generation capacity. However, the prices of power plant pumps have fallen due to many manufacturers having overcapacity. As a result, we need to measure the attractiveness of each order against our return expectations.

We expect demand to remain high in mining, where our pumps are used for the hydraulic transport of solids, among other things. In this market sector, mine operators are investing in new plants and modernising existing open-cast and underground mines. The focus of these investments is in South America and southern Africa, as well as in Canada’s oil sands areas. But the mining industries in Australia, China and Indonesia also offer interesting business prospects.

The growth in orders for submersible pumps, primarily used by our customers for wells, sewage systems and building drainage, looks set to continue. However, new water supply and waste water disposal projects generally depend on public-sector entities being willing to invest, who are currently experiencing some financial difficulties. It remains uncertain how demand will develop in the countries of North Africa. Once the political situation there stabilises, deferred water supply and agricultural irrigation projects could result in new orders, for instance orders for submersible borehole pumps used in well fields.

We will increase the marketing of such pump sets, which are also needed for caverns, mines and domestic water supply systems, by means of special sales initiatives in promising markets. A new field of application for our pumps is in the cooling systems of generators and transformers used in the construction of offshore wind energy plants.

Pump energy consumption will remain an important purchasing criterion for cost-conscious customers. As part of our campaign for greater energy efficiency, we aim to convince more and more users to take advantage of the demonstrably high savings potential in pump operation. Accordingly, we anticipate growing interest from customers in automation products such as variable speed systems, diagnostic devices and high-efficiency motors.

Overall, we expect orders for pumps and related automation equipment to grow in 2012 and 2013.

  • Valves

We also expect sales of globe valves, gate and butterfly valves as well as related control and monitoring systems to increase. This applies in particular to our general business with standard valves for industrial and building services applications. In the coming years we plan to continuously improve our market presence in this business by developing and delivering new products.

Our new Chinese factory in Changzhou will help us tap the global valve market even better. The low-pressure valves manufactured there are supplied to customers in China, and are also used to supply foreign markets with products at competitive prices.

We foresee good growth prospects for the marine market in Asia and expect to receive more orders again for equipment for tankers transporting liquefied natural gas. We are also using the contacts and range of our new South Korean company KSB Seil Co., Ltd. to supply shipyards in South Korea, Japan and China with suitable cryogenic valves, actuators and control systems.

In our domestic market of Europe, we plan to focus our activities in those countries in which demand is growing or in which our share of the valve market is still comparatively low. The intensification of our general business with standard globe, gate and butterfly valves in Europe is designed to help offset the continued weak demand for power plant valves.

Both this year and next we will be launching a range of application-specific products to achieve our growth targets for the valves business. For instance, we are expanding our product range to include new valves for fire protection equipment, stainless steel gate valves for power stations, gate valves, globe valves and check valves for liquefied gas plants, and heat transfer valves for solar thermal systems. In addition, we are introducing improved electronic positioners for valves.

  • Service

We will continue to expand our service centres outside Europe. We are creating new structures that will provide our customers with fast, expert services and will focus this year on the Region Asia / Pacific. The growing Chinese market in particular offers good prospects when it comes to increasing the volume of our maintenance and repair service business.

We will also strengthen our activities in the mining industry, particularly in Australia and Indonesia, where the demand for maintenance of slurry pumps is always high. Overall, we want to continue to improve our services in countries with intensive mining activity.

A deterioration in economic conditions does not necessarily entail a decline in orders in the service market. This also applies to services relating to pumps and valves. Putting off investments in new plants can in fact result in an increase in the budgets for the maintenance of existing plants. Overall, we anticipate the growth in our service business in 2012 to be roughly equal to that of 2011. The 2013 financial year too is expected to see growth.

OUTLOOK FOR THE GROUP AND THE REGIONS

In 2012 and 2013, in line with our Group strategy, which extends right up to 2018, we will expand our business in the BRIC countries and other interesting markets. The relevant Group companies will focus intensively on this task in addition to carrying out their daily business. A key element of our strategic business development is strengthening our general business with standard pumps and valves, which we plan to achieve by targeting promising markets.

Current business development is marked by the uncertainties described at the beginning of this section and in the Risk Management Report. If economic events significantly alter conditions in the regional markets, we may need to adapt our planned activities as described below at short notice.

  • Europe

We anticipate a moderate increase in European order intake for standard pumps and valves this year. In 2012, our general business with these products is expected to grow more than project business, backed up by targeted sales initiatives. Project business is more dependent on financing possibilities and investor confidence in continued economic growth. We are confident that the project business too will recover in 2013.

In Southern Europe in particular, it is unlikely that state and municipal authorities will be able to allocate major financial resources to new water supply and waste water treatment facilities over the next two years. A reluctance to invest in energy generation is likely throughout the whole of Western Europe. It is not only financial considerations that are holding back investment but also the ongoing uncertainties about the energy mix that policy makers are seeking.

GROSS DOMESTIC PRODUCT GROWTH (BRIC)

By contrast we see good opportunities in project business in Eastern Europe, where we intend to establish a new company in Ukraine. Aiming to exploit the opportunities of the growing Russian market, we are opening two new service centres in Moscow and St. Petersburg. These will enable us to offer our Russian customers higher quality service for power plant and water pumps.

  • Middle East / Africa

There is continued uncertainty concerning future political developments in North Africa and the Middle East. In the absence of dramatic new events it is to be expected, however, that the economic situation in the Region will at least stabilise to some degree, hence the previously mentioned hope that deferred projects in North Africa will enter the procurement phase. Major contracts are set to be awarded in Saudi Arabia, the United Arab Emirates and Iraq too, which could in turn benefit our pumps and valves business.

South of the Sahara, some countries will be able to continue enjoying extraordinary economic growth thanks to their reserves of oil and raw materials. We mainly tap into this market using our South African production and sales company in Germiston (Johannesburg), which has two sales offices in Ghana and Kenya. We also see good opportunities for driving forward our business in the Republic of South Africa, and, with this in mind, are planning to launch more locally manufactured products onto the market. At the same time we will facilitate access to products produced by our global manufacturing network.

  • Asia / Pacific

Despite the projected slowdown in the economy, the markets of the Region Asia / Pacific offer comparatively good prospects for the sale of pumps, valves and services. In China, India and Indonesia we anticipate investment in water and waste water infrastructure, in which we will be able to participate. The same applies to new power plants in the large emerging economies and to the construction of new liquefied gas tankers in East Asian shipyards. In the Chinese market international orders for local power plant construction companies could open up indirect export opportunities. Moreover, we expect that more nuclear power plants will be built in both China and India.

New projects for the extraction of raw materials will create opportunities for using our slurry and process pumps. Australia and Indonesia are two countries in which we are strengthening our business with these pumps and related services.

With a view to servicing the Asia / Pacific market largely from the Region itself, we will use the manufacturing facilities we expanded in 2011 in Pimpri (Pune) in India, and in Shanghai and Changzhou in China. In the current year we will also expand our facilities in South Korea, Malaysia, Thailand and Taiwan and found a new company in Vietnam. The latter will be involved with sales and assembly in addition to providing services to our customers. We are also broadening our sales and distribution network, especially in China, to increase sales of standard pumps and valves in the general business. In Bangladesh too we are planning to increase our sales activities.

  • Americas

In the American markets, demand for our products in some key industries could well increase. In several South American countries and Canada major water supply and waste water disposal projects are set to be awarded. Significant investments in mining and oil and gas production are also planned, which will result in corresponding orders for pumps and valves. Realisation of these projects will depend on the prices of raw materials and energy sources remaining attractive.

Demand for pumps and valves for power plants is expected to be rather subdued. Investors, in the US for instance, are waiting for political decisions to be taken on the future of energy supplies. Overall, due to a rapidly changing competitive environment, particularly in Brazil, prices are expected to fall in the project business.

We will promote our general business, focusing on the Brazilian market and on strengthening our local distributor network. At the same time, we plan to expand our service facilities. Overall we expect order intake to grow again.

We are modernising and expanding our production capacity to allow us to supply the American markets quickly with the products they require. In 2012 this will apply both to our US slurry pump plant and our Brazilian valve production facilities. A new basis for the latter will be created with the construction of a new plant in Jundiaí, around 60 km from the city of São Paulo.

FINANCIAL OUTLOOK

Despite the many economic uncertainties, we anticipate, as already stated, moderate growth in order intake for all three segments (pumps, valves and service). We expect our general business in particular to develop positively both this year and next, while we believe the market for project business will remain difficult. We do not expect to see recovery in this sector until 2013. Overall, we forecast a single-digit percentage rise in order intake this year and in 2013. However, any significant economic downturn or a return to recession would have a negative impact on our business volumes.

We anticipate that sales revenue will increase in all three segments in 2012, with growth higher than the increase in the volume of new orders; in 2013 we expect growth to be similar to the growth in order volumes.

Based on this growth in business, we expect an increase in our profit in all three segments this year and next, despite cost increases. For 2012 we aim for earnings on a par with those in 2010. In 2013, absolute growth is expected to exceed that of the previous year. However, if spending in our markets were to decline due to an economic slowdown or if profit quality were to deteriorate, earnings would likely stagnate or fall. Should this turn out to be the case, it is possible that we would intensify our efforts to secure a reasonable level of revenue.

Our expenditure on property, plant and equipment is likely to rise in 2012 and 2013. Thanks to our continuing sound financial situation and restrictive liquidity management, we expect to be able to fully finance these investments from equity capital.

Employee teams are currently implementing the aforementioned strategic projects in all four Regions in order to ensure sustainable and profitable growth in the pumps, valves and service businesses. We will continue to provide the necessary financial resources and capacities for this in future, thus creating the conditions for achieving the goals laid down in our Group strategy.

We will only consider acquisitions if they fit with our key strategic projects and are likely to prove highly advantageous from a financial and strategic point of view.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. We wish to point out that actual events may differ materially from our expectations of developments if one of the uncertainties described, or other risks and uncertainties, should materialise, or if the assumptions underlying the statements prove to be inaccurate.