RISK MANAGEMENT

  • Continued price pressure in project business
  • Intensified competition in emerging countries
  • Adaptation to changes in the energy market

As an organisation that operates throughout the world, the KSB Group is exposed to both global and regional risks. We need to be aware of these risks before we can responsibly pursue the opportunities present in our markets. In our Risk Management Manual we defined the task of management as being the continual identification and assessment of risks, and the reporting of these to Group headquarters. Managers are also encouraged to take timely measures to prevent or limit the damage that can result from the occurrence of risk events.

Our risk policy reflects our declared ambition to grow sustainably and profitably. We want to recognise the dangers that threaten the success of the company or its continued existence at an early stage. For this we use various risk management and control systems. Our strategic corporate planning, analysis of early warning indicators and our internal reporting system all provide us with vital information.

In line with the organisational and accountability structure at KSB, the managers of individual units – such as the Business Units, Corporate Functions and Group companies – are all involved with risk management. They are under the obligation, among other things, to supply the business and financial indicators for which they are responsible on a monthly basis. Each quarter they also provide an assessment of the anticipated business development for the following 18 months, and twice a year report all recognised risks to Group headquarters. The Board of Management and Supervisory Board receive a risk report based on this information at least twice a year.

The Internal Audits department is integrated into the risk management system as part of our control system. It regularly checks whether all operating units are complying with the guidelines and are actively contributing to the identification and assessment of impending risks. To allow them to study the highest risk units, auditors are granted access to Group headquarters data. As part of their audit, they ensure that the operating unit managers observe the defined rules and take part in risk management.

Information obtained by Internal Audits on both the recognised risks and the countermeasures introduced in response forms an integral part of the reporting to the Board of Management and the Audit Committee of the Supervisory Board.

Controlling and Finance and Accounting also perform important monitoring tasks when it comes to the management of opportunities and risks. Accounting is responsible for preparing the annual and consolidated financial statements, according to subprocesses clearly defined in advance.

We describe, assess and communicate risks which adversely affect our net assets, financial position or results of operations and our reputation in line with the following categories:

MARKET / COMPETITION

Now that the global financial and economic crisis has subsided, our markets have largely recovered. In our general business, production output has already returned to pre-crisis levels. In project business, however, we are dependent on sectors with long investment cycles, where there is currently still a reluctance to award contracts. Because of the overcapacity that continues to exist on the supply side and the resulting intense competition, the pressure on our products’ selling prices is ongoing, a situation that could worsen due to the current uncertainty in the market and in particular the European financial crisis. It is also conceivable that future economic developments will again affect our general business. There is a risk that demand will fall and our sales revenue will grow more slowly than expected. We will counter possible negative impacts on our earnings with measures to improve our margins.

The demand for pumps and valves for power plants, as well as for related services, is determined by the global demand for energy and by environmental policy decisions. Especially in Germany, the power plant market will be altered by the energy transition policies ushered in by the federal government. We are set to lose business volume in terms of the products and services supplied to operators of nuclear power plants, and will need to compensate for this loss by increasing our sales of pumps and valves in other areas, such as that of renewable energies. Where this substitution is associated with higher costs, it may have a negative effect on earnings.

In addition, there are delays in China and India in the construction of new nuclear power plants. Because of the nuclear disaster in Fukushima, the authorities in China in particular have introduced additional safety checks.

In the markets of the Middle East and North Africa, the Arab Spring has led to delays in the awarding of contracts, in particular for major projects. While we believe that individual projects may be implemented this year, there is also the risk of continued or widening conflict. Should demand continue to stagnate, the development in the sub-Sahara region could to some extent help us achieve our regional growth targets.

Competition continues to grow in the BRIC countries, where, in some sectors, our competitors have more financial and technical resources. There are also local suppliers of pumps and valves, some of which have more favourable cost structures. We have implemented a number of strategic measures to open up these markets yet further and defend our existing market share. Awareness of our brand is helping us in these countries, in which we have been active for decades. The changing competitive situation may however still delay our planned growth and reduce our market share.

PROJECTS / PRODUCTS

The fact that our staff are trained in project management means that they are able to recognise the risks associated with our strategic projects at an early stage. This applies equally to risks arising from the acquisition of major orders from our customers. We want to identify these risks before submitting our quotation, and reduce them through targeted measures. Our project managers are supplied with the appropriate management tools and all projects undergo clearly structured approval processes.

New designs involve both technical and financial risks. We limit technical uncertainties by defining intermediate steps and subjecting partial solutions to close scrutiny. This also applies to the pumps which we will be supplying for a new type of power plant as part of a major Chinese order.

We minimise the financial risks associated with the development of user-specific products by drawing up appropriate contracts with our customers.

There are no known significant risks that could result from any technical problems with our products.

FINANCES / LIQUIDITY

Our strategic development encompasses acquisitions and the formation of joint ventures. The resulting integration of employees, processes, technologies and products also harbours a number of risks. If the harmonisation of structures and programmes does not take place within the planned time frames, this may result in financial burdens.

Project business can generate risks with regard to our liquidity. As well as the continued pressure on our selling prices, which reduces our profit margins, these risks include more stringent contractual terms and conditions, such as lower advances or down-payments and tougher contractual penalties. We counter this risk by carefully monitoring the approval processes in the quotation phase and constantly keeping an eye on our net financial position, which enables us to avoid liquidity shortages. If necessary, we ensure sufficient liquidity by agreeing lines of credit for the affected companies in good time.

We use foreign exchange hedges to reduce the risks from transactions involving different currencies. These are generally currency forwards, which we use both for transactions that have already been recognised and for future cash flows from orders still to be processed. We have concluded currency forward contracts with external partners to cover foreign exchange risks from trade payables and receivables. Their notional volume was € 148.0 million.

To prevent customer payment defaults, we have established a strict receivables management system and also take out trade credit insurance.

PROCUREMENT

We have recently been subjected to strong commodity price and procurement time fluctuations due to market volatility. Where we are unable to compensate for cost increases or pass them on to our customers, this could have a negative effect on our earnings. We are therefore actively seeking new, better value suppliers, especially in Asia, and are taking advantage of the larger purchase volumes that arise when we pool the requirements of the various KSB plants.

TECHNOLOGY / RESEARCH AND DEVELOPMENT

It is essential to our future success that we have a product and service range that is suited to the market in terms of technology, price and delivery time. The changing needs of our customers and new standards and regulations make it necessary to continuously develop and improve our products and services. One of the areas that we are currently focusing on in this regard is the development of extremely energy-efficient products.

It is important to identify the market-related or technical risks early on in order to deploy the resources required for innovations effectively. To this end, we have created and documented a development process that includes various levels of control. As sales employees are regularly included in this process, risks arising from intermittent changes in the markets or application areas are incorporated into the assessment at an early stage.

ENVIRONMENT

Our production activities in particular are subject to numerous environmental protection laws and regulations. At all the company’s sites specially assigned employees monitor compliance with laws and regulations as well as with KSB’s own internal rules, which in some cases exceed the prescribed environmental standards. When acquiring companies, we always examine existing sites prior to purchase for possible contamination. If we discover any contamination, we set aside provisions to pay for the necessary clean-up work.

STAFF

We need qualified personnel at all our sites if we are to achieve our ambitious growth and profitability targets, including technical specialists. Due to the demographic changes in some countries, the competition for highly qualified professionals is increasing and will intensify when the economy recovers.

We counter this risk with demand-oriented measures, systematic human resources planning and international recruitment processes. Where possible, we are training our own young talent, as well as contacting potential candidates at universities and universities of applied sciences.

Our aim is to enable staff to reconcile the needs of family and professional life, and this means that employees with children or family members requiring care should be able to continue working for us even when faced with onerous personal commitments. For more senior staff we create conditions that enable them to work for longer than in the past.

OTHER RISKS

The manipulation and loss of electronic data can lead to serious commercial disadvantages. We minimise this risk through secure access procedures and data backup systems. By centralising the IT systems of our various operating units, we are able to achieve high security standards and reduce the risk of data loss and corruption. Other possible risks associated with the work carried out by our staff include violations of the law and dishonest behaviour that cause KSB financial loss and damage our reputation. We counter these risks by means of the aforementioned compliance training and by ensuring compliance with the KSB Code of Conduct.

OVERALL ASSESSMENT

Overall, we did not identify any risks in the 2011 financial year that could significantly or permanently impair the net assets, financial position, or results of operations.