Outlook for the Wilo Group
The 2016 financial year was characterised by only weak growth in the global economy, numerous crises, and political and economic imponderables. As things stand, considerable uncertainties are also casting a shadow over the generally improved economic prospects for 2017. For example, the economy of the USA could stimulate the global economy with its recently consolidated upturn. The rate of expansion in the emerging economies as a whole could also regain momentum despite the structural slowdown of Chinese growth. However, the turnaround in US interest rate policy and structural deficits in many countries remain economic risks. Above all, the conflicts in Syria, Turkey, Russia and Ukraine as well as the uncertain political direction of the USA and, increasingly, major countries of the euro area could also do harm to the global economy. Rising tendencies towards protectionism and nationalism are another major factor creating uncertainty. The Brexit process starting in 2017 has the potential to be particularly explosive. The economic outlook for 2017 is good overall, but fragile and very uncertain.
It is therefore all the more important for Wilo to implement its business policy in a clear, sustainable and forward-looking manner and to balance risk within the business. The Wilo Group will therefore continue to count on successful customer orientation, strong innovation with the continuous development of new technologies, great international market presence and diversification in terms of regions and market and product segments. Other important success factors include high entrepreneurial flexibility and fast adaptability to altered trends and conditions. These are especially important in crisis situations. The many years of profitable corporate growth and the growing workforce illustrate the Wilo Group’s adaptability and the company’s stronger position compared with its global competitors. Regardless of the short-term deterioration in conditions as a result of macroeconomic and political uncertainty, the capacity for innovation has been ramped up.
The company will retain this successful core focus. With the eight growth initiatives clearly defined in Ambition 2020+, Wilo will tap into additional potential for profitable growth regionally, in all product and service divisions and along the value chain from 2017. In addition, corporate acquisitions to promote growth will play a greater role in the future, provided they make good strategic and economic sense. Focusing on core competencies in heating, air conditioning and cooling as well as water supply and wastewater disposal, the Wilo Group will further expand its product portfolio in order to become an innovative and solution-oriented full-service provider.
Another basic principle of Wilo’s corporate governance is and shall remain quickly analysing different market developments, devising alternative scenarios and initiating countermeasures at short notice. A great deal of importance is attached to effective crisis management in case of considerable volatility on the international financial and currency markets and the intensification of geopolitical crises with a corresponding negative impact on the real economy. When necessary, the Wilo Group will continue to initiate appropriate and prompt countermeasures from this position of strength in future.
The management also has its sights firmly set on the megatrends that will change and shape Wilo’s markets in the decades to come. They are one of the cornerstones in the definition of the corporate strategy – regardless of short-term crises and fluctuations in demand. The megatrend of digitalisation and technological advancement is incredibly important, and is already necessitating extensive business initiatives in order to take the resulting opportunities and to avoid future disadvantages for the company. To this end, Wilo is continuing on the path it has struck for its own digital transformation. Its own value chain and existing business processes are being fundamentally and sustainably reorganised with high levels of investment – especially at the Dortmund location. This centres on the intelligent, digital networking of production methods, products and logistics. It is sustainably improving the Wilo Group’s competitiveness while generating direct benefits for customers, including in terms of quality standards, punctual deliveries and optimised service. In addition, Wilo is purposefully targeting its innovative capacity at providing customers with intelligent, networkable solutions.
Outlook for the regions
EUROPE The economic research institutes anticipate robust economic growth for Europe in 2017, but it will be exposed to various political risks. 2017 may well decide the fate of the European Union and the euro area. If Eurosceptic voices win out in the elections in France, the Netherlands and Germany, this could be a crucial test unlike anything the community has experienced before.
In addition, various banks have not yet bounced back from the crisis, especially in Italy, and the budget situation in Italy and Greece remains strained. The lengthy process of negotiations until the UK actually leaves the EU will also add fuel to the fire of uncertainty. Growth is expected to slow down in the UK in 2017, with negative effects also for other nations’ exports to the country. Nonetheless, all countries in the region are set to boast positive growth rates in 2017. Europe’s construction industry is forecast to grow on a broad regional basis and at a faster rate than the overall economy in 2017.
There is high demand for energy-saving and, environmentally friendly heating and air conditioning systems. Because existing systems are largely outdated and environmental protection requirements are becoming ever stricter, there will be a tendency for demand to rise in both the construction of new buildings and the modernisation of existing ones. Governments can also be expected to launch further energy-efficiency incentive programmes in line with the EU’s ambitious climate targets – similar to the heating optimisation programme initiated by the German Federal Ministry of Economics in 2016. The good financing conditions at present are boosting investments in climate-efficient and economically beneficial heating and air conditioning systems and in the modernisation of water and wastewater plants. Therefore, the Wilo Group expects demand for high-quality energy-efficient pumps to continue to grow throughout Europe over the coming years.
This means that conditions for the Wilo Group’s business activities in the Europe region will remain good in 2017. Driven by the rapid pace of new residential construction and robust demand in commercial building construction and generally for the renovation and modernisation of existing buildings, the Wilo Group expects the brisk growth in net sales to continue in the German-speaking countries. The economic revival is also likely to stimulate demand in the other EU countries, especially in Eastern Europe. In this respect, Wilo also expects net sales to increase here.
The expansion of the Wilo Group’s activities as a systems and solutions provider for building technology will pay off for the Building Services market segment. In previous years, the Wilo Group laid the foundations for efficient production and increased flexibility and proximity to the customer, and therefore for sustainable growth, with substantial investments in Germany and France.
All in all, the Wilo Group expects to be able to generate slight net sales growth in the Europe region in 2017, even if it is below the Group average.
ASIA PACIFIC The Asia Pacific region is characterised by high momentum. The growth forecasts for the region for 2017 are positive. In addition, the structural drivers relevant to the Wilo Group’s business activities are intact: strong population growth, persistent urbanisation and thus immense, even growing demand for the enhancement of functional urban infrastructure. Substantial investment is required to establish and ensure a powerful drinking water supply and wastewater disposal network. In addition, governments are stepping up measures to reduce CO2 emissions, especially in China, in response to sometimes considerable environmental pollution.
The Wilo Group assumes that demand in the Asia Pacific region will continue to grow in building construction and above all in the water management segment in 2017. The property market in China’s megacities and other Asian conurbations is slowing down in the high-end segment. However, most countries in the region have programmes for affordable housing. Commercial construction is also providing stimulus. The planned establishment of 100 smart cities in India, which in the wake of digitalisation will require state-of-the-art, networkable products and solutions, is also an interesting prospect. The Wilo Group’s business activities in Asia Pacific are driven to a significant extent by the high investments in all countries of the region to build up or modernise their often dilapidated water management infrastructure. Overall, the Wilo Group therefore has very good growth opportunities in 2017 for all three market segments in Asia Pacific.
The Wilo Group expects the very positive business performance in the Asia Pacific region to continue in 2017. Asia Pacific region will remain the Wilo Group’s growth driver in 2017. The net sales growth in the region is therefore expected to once again surpass the growth of consolidated net sales in 2017.
EMEA The EMEA region is extremely heterogeneous both politically and economically. This is also reflected in the outlook for the Wilo Group’s business activity in the individual countries in 2017.
In Russia, the prospects for at least robust development of construction activity are gradually brightening. The government’s policy of import substitution by promoting domestic production is now also leading to a palpable increase in direct investments from foreign firms. By opening its own production site at a new location near Moscow in 2016, the Wilo Group laid the required groundwork to benefit from these trends. In this respect, the Wilo Group anticipates rising net sales in Russia in 2017.
In Turkey, the short-term economic conditions have deteriorated due to the unstable political situation. Key data such as the sentiment indicator for the construction industry and building permits are currently signalling a comparatively resilient development in residential construction. However, a decline cannot be ruled out in light of the high degree of uncertainty. This environment will require high flexibility and a selective approach in 2017. The same applies to business activity in the countries of the Middle East and North Africa. Positive economic demand stimulus is expected from the oil-importing countries and certain countries south of the Sahara.
All in all, the Wilo Group expects business in the EMEA region to pick up again in 2017, provided the crises there do not escalate. The net sales growth generated in the region is set to be somewhat lower than the average increase in consolidated net sales expected in 2017.
Statement by the Executive Board on forecast development
In all likelihood, 2017 will continue to be dominated by difficult macroeconomic conditions and present major challenges for companies with international operations. While there are positive signals of a broader economic recovery, uncertain political developments could slow down the global economy again and lead to volatility – both on the foreign exchange and capital markets and in the real economy. Besides numerous unresolved crises, causes for concern include the increasing tendency towards protectionism and the as yet unpredictable changes in political direction in Europe in connection with Brexit and the elections in several major countries. Even more than in previous years, this particularly precarious and sensitive environment requires anticipatory, risk-conscious and flexible company management. The Wilo Group has implemented corresponding structures and processes. In addition, the broad regional diversification of the business reduces the overall risk for the Wilo Group in individual countries. Provided the impacts of these risks remain limited, the positive basic economic trend should win out with brisker demand in most of the countries of importance to the Wilo Group.
The net sales and cost planning for 2017 takes the described uncertainties into account. In addition, current developments are continuously observed and new trends are anticipated, analysed and evaluated in a timely manner. This means the Wilo Group is well prepared to leverage the growth potential in regions and countries that are enjoying positive development on a targeted basis, as well as implementing additional risk mitigation measures in regions and markets that could be affected by potential setbacks. The Executive Board of the Wilo Group is confident that the company will enjoy successful further development in line with its corporate strategy in spite of this difficult environment.
On the basis of the expected regional business development described above, the Executive Board anticipates growth in the Wilo Group’s net sales of up to 4 percent in the 2017 financial year. The expectation for net sales in 2017 is based on the assumptions that the world economy will develop as forecast and largely free of disruption and that there will be no major upheaval on the currency markets.
In 2017, the EBIT margin is expected to improve to around 9 percent, thereby falling within the strategic target corridor of between 9 and 11 percent once again. To achieve this, the consistent cost management – supplemented by the WIN cost initiative launched at the end of 2016 – will be continued and promptly and flexibly adjusted as necessary. The continued and streamlined management of working capital and the targeted implementation of strategic measures will also help to safeguard the Wilo Group’s high earnings power.
The Wilo Group systematically aligns its activities in research and development with the medium-term and long-term corporate strategy. The primary objective is to remain independent and generate profitable growth. Among other things, this requires a consistently high degree of innovative strength, irrespective of short-term market uncertainty. Research and development continues to play an important role. The Wilo Group stands for future-oriented, innovative products and system solutions. Accordingly, expenditure for research and development will again reach a high level in 2017. This is driven particularly by the digitalisation of internal processes and of products and services.
The high levels of investment in recent years provide the foundations for the Wilo Group’s growth. This approach will continue to be pursued, as a modern, effective corporate infrastructure that promotes growth is an essential requirement for sustainable growth and high profitability. Investments shall again be significantly increased in the 2017 financial year. For example, the strategic location development project at the headquarters in Dortmund will continue as planned. In addition, there will be greater investment in manufacturing technologies and the expansion of the existing sales and production locations. The implementation of projects for the digital transformation of the Group will remain a point of focus in 2017. Moreover, corporate acquisitions will be pursued to a greater extent in the future, provided that they appear beneficial from both a strategic and economic perspective.
The long-term financing structure, the extremely high equity ratio of over 50 percent, cash of around EUR 180 million and the net-debt-free financial position constitute a solid basis for the long-term profitable growth of the Wilo Group. Under the terms of the long-term financing instruments in place as at 31 December 2016, WILO SE is required to comply with certain standard financial ratios, or covenants. WILO SE fully complied with these covenants in the 2015 and 2016 financial years and there are currently no indications that it will be unable to comply with them in future.
Overall, the risks and the impact of any possible forecasting inaccuracies regarding the development of the sales and procurement markets, and the currency markets in particular, are considered to be especially high in the 2017 financial year. This means the net sales and EBIT forecasts of the Wilo Group are subject to greater uncertainty. The global orientation of the Wilo Group means that regional economic fluctuations can be partially offset. However, a slowdown in global economic momentum – likewise massive changes in the relevant exchange rates, the escalation of political crises or a drastic deterioration of international trade relationships – could substantially influence the growth targets of the Wilo Group.
The business targets for 2017 are embedded in the corporate strategy with “Ambition 2020+”. They are based on a professional and detailed planning process and take into account information on and knowledge of internal and external factors that were available at the time of this management report being prepared. Future unforeseeable developments and events may lead to changes in expectations and deviations from forecasts. All estimates compared with the previous year are based on an unchanged basis of consolidation and unchanged exchange rates.