Company-specific risks and opportunities
Research and development
Wilo is firmly committed to technological progress. The company continuously invests in the development of new technologies and products to strengthen its market position. In 2016, research and development costs including capitalised development costs amounted to 4.9 percent of consolidated net sales. Wilo conducts regular technology screening and maintains continuous dialogue with universities and research institutions in order to identify the opportunities of new technologies at an early stage. The risk of paying insufficient attention to customer requirements in the development process is limited with customer surveys, trend analyses and targeted market tests.
The effectiveness and target conformity of all development activities are examined continuously. The purpose of this is to minimise qualitative, time and financial risks in development projects. Professional project management and regular deviation analyses ensure a constant focus on customer requirements. Binding Group-wide standards and guidelines are applied here. The occurrence of risks from research and development is possible, but the impact on the results of operations of the Wilo Group is considered low.
Quality risk is mitigated by uniform Group-wide standards in production (Wilo Production System) and comprehensive quality management. This risk is classed as unlikely on the whole. The risk of production stoppages is strictly limited through the use of state-of-the-art production plants and professional control systems. The Wilo Group counters procurement risks by way of integrated procurement and supplier management. Supply bottlenecks are primarily prevented by ensuring the availability of second-source suppliers. Insurance is also taken out to offset the financial consequences of business risks of this kind. If such risks occur despite this, the company estimates that this could entail a medium earnings effect for the Wilo Group.
The Wilo Group’s success is built on its qualified employees and their expertise, commitment and motivation. The loss of qualified personnel in strategic positions constitutes a risk that can lead to the loss of company-specific knowledge, capacity bottlenecks or decreased productivity. The Wilo Group counters this risk with methods such as coordinated demographic management, which includes active succession planning and the development of new staff as part of Group-wide talent management. The occurrence of HR risks is generally possible. However, the impact on EBIT is classified as low.
All important business processes for the Wilo Group are integrated into IT systems. In extreme circumstances, the failure of key systems or substantial data losses could lead to business interruptions. WILO SE mitigates these IT risks with daily backups of all critical business data. To this end, the business database aiding production, materials management, order processing, financial accounting and cost accounting in particular conforms to top security standards. WILO SE runs its critical business applications in two separate, certified and highly powerful data centres. Certified processes and business recovery plans are also in place for the event of disasters. An annual monitoring audit is performed to maintain the certificate. System downtime is further minimised by targeted utilisation of an in-house support team and outside service providers. Given these measures, the occurrence of IT risks is unlikely and the earnings effects have been limited to a medium level.
Acquisitions and strategic partnerships
In order to expand its technological spectrum and geographical presence, the Wilo Group also provides for the realisation of external growth opportunities as part of the corporate strategy. Company acquisitions are considered only if they appear beneficial from both a strategic and economic perspective. The opportunities arising from acquisitions and strategic partnerships are varied. Acquisitions and strategic partnerships offer additional potential for growth and efficiency. In addition, they can provide access to new sales channels and markets. With regard to research and development in particular, the Wilo Group enters into strategic partnerships in order to advance joint technology projects. It cooperates with prominent universities and research institutes in this area.
In addition to the opportunities resulting, among other things, from the expected synergies, company acquisitions also entail risks. Accordingly, each investment decision is preceded by a careful assessment and analysis of the commercial, technical, legal, tax and financial conditions (due diligence) in order to identify, quantify and limit the risks associated with the acquisition. In addition, an individual strategy for integration into the Wilo Group is developed for each acquisition and corresponding measures are planned and implemented.
However careful this examination may be, risks may emerge after an acquisition that were not identified during the due diligence process, not considered to be material or not accurately quantified. In addition, the identified benefits and synergies may not occur to the expected extent, within the expected timeframe, or at all. The integration process may be more difficult and cost-intensive than expected, thereby jeopardising the realisation of the planned goals and synergies. If business fails to develop as expected, the necessary goodwill impairment may have an impact on earnings.
The occurrence of risks arising from acquisitions and strategic partnerships is generally possible. The Wilo Group considers the corresponding impact on its earnings to be moderate (medium earnings impact according to risk classification).