Statement by the Executive Board on the economic situation
2016 was a turbulent year, dominated by sometimes surprising geopolitical and economic trends and events. Nationalist and protectionist tendencies increased worldwide. The UK’s decision to leave the European Union and the course for economic policy announced after the surprising election outcome in the USA are just two examples of this worrying trend. Moreover, the conflicts in the Middle East remain unresolved, the attempted coup in Turkey plunged the country into a deep crisis, and the extension of the sanctions against Russia mean that the tension in this region is not going to lift any time soon. In Europe, some of the major countries are facing elections with uncertain outcomes, while Italy suffered under the government and banking crisis. In this confusion of different strains and risks, uncertainty among market participants palpably increased. As a result, investment activity in industrialised nations remained low, and growth momentum in the emerging economies flattened. The foreign exchange markets were extremely volatile; numerous currencies depreciated against the euro. The economic revival expected by most at the start of the year failed to materialise. These various influences also had a sometimes markedly negative impact on the development of individual markets that are important for the Wilo Group.
Taking this difficult, uncertain political and macroeconomic environment into account, the Wilo Group’s Executive Board rates the business performance in 2016 as generally good. The Wilo Group reacted flexibly to these challenges with accelerated sales measures and cost adjustments and grew profitably again – for the seventh year in a row. Adjusted for exchange rate effects, the growth in net sales was 3.9 percent and thus slightly below the increase of up to 5 percent originally anticipated for the year under review, which was based on the assumption of an economic recovery and stable currency conditions. The depreciation of numerous important currencies for the Wilo Group reduced the growth in net sales in the Group currency to 0.8 percent.
The Asia Pacific region was again the Wilo Group’s growth driver. Net sales in the Group currency grew by 4.4 percent here. Business activity was significantly increased in China and Korea. This more than offset the declines in net sales in India and Southeast Asia, which were chiefly due to the weakness of the industrial sector.
The picture in Europe was also varied. Net sales here were roughly on a par with the previous year. Growth in the German-speaking countries, the Mediterranean region and Scandinavia nearly compensated for the decline in net sales in France, the Eastern European countries and, as a result of currency effects, also the UK.
The EMEA region is crisis-stricken, but the Wilo Group’s economic performance in Russia in particular was thoroughly positive. The good market position was further improved and high net sales growth was generated in local currency. Business activity in Turkey was on a par with the previous year in local currency despite adverse conditions.
The Wilo Group’s profitability, measured on the basis of the EBIT margin, fell short of expectations from the start of 2016 and declined from 9.2 percent to 8.1 percent. However, this is primarily attributable to the consistent, anti-cyclical initiation or continuation of strategically important, growth-oriented, future-proofing investments and projects. The objective is to secure the targeted acceleration of profitable growth in the medium and long terms. In addition, the margin was reduced by shifts in the product sales mix. In this respect, the profitability achieved is still considered good.
Strategically, the targeted expansion of international market presence is of great importance to the Wilo Group. With wide-ranging regional diversification, the company intends to balance out the different trends, fluctuations and risks in individual countries and regions, while taking advantage of the resulting opportunities in a targeted manner. This is a key factor in the Group’s success particularly in a climate of major economic challenges, escalating crises and steadily growing uncertainty. The business performance in the year under review is clear evidence that this strategic approach is highly appropriate. The net sales performance in the individual regions demonstrates the Wilo Group’s ability to limit the impact of adverse developments and risks in individual countries thanks to a strong local market presence and to offset these effects with strong growth in other countries.
Another strategic aim of the Wilo Group is to strengthen its innovation and technology leadership in order to secure its sustainable, profitable growth in the future. Total research and development costs including capitalised development costs increased slightly in 2016 compared to the previous year. At EUR 65.0 million, they amounted to 4.9 percent of net sales. This was the highest level of investment in research and development in the Wilo Group’s history. Important new products were again developed to market maturity in 2016. One example is the Wilo-Stratos MAXO, which is being presented at ISH, the world’s leading trade fair, in March 2017 and sets new standards in terms of system efficiency, communication capabilities, connectivity and ease of use.
Regardless of short-term economic fluctuations, the Wilo Group is counting on relevant, long-term megatrends. Investments that are guided by these megatrends and secure the strategic target of sustainable, profitable growth continue to be made in difficult times – including the year under review, when capital expenditure broke the record set in the previous financial year. The Wilo Group invested EUR 109.5 million in 2016. Capital expenditure was primarily aimed at the advancement of new manufacturing technologies and the construction and expansion of new and existing sales and production locations. As part of the strategic location development project, Wilo will construct a state-of-the-art factory at its headquarters in Dortmund over the coming years, among other things. Production is being fundamentally redesigned in order to lay a milestone in terms of digital transformation and Industry 4.0. Wilo is thus underlining Dortmund’s importance as a high-tech location.
Despite the increased expenses for research and development and the higher capital expenditure, significantly positive free cash flow of EUR 24.2 million was generated again in the year under review, surpassing the previous year’s figure. This demonstrates the company’s capacity for self-financing. In addition, the structure of the statement of financial position was further improved, with the equity ratio rising from 49.3 percent to 53.6 percent. This also demonstrates the successful implementation of the Wilo Group’s strategy and its high degree of flexibility.
In addition to organic growth, Wilo is also counting on M&A transactions to strengthen the company and further advance both growth and profitability going forward. By acquiring GVA Gesellschaft für Verfahren der Abwassertechnik mbH & Co. KG, Wilo augmented its activities in the wastewater sector and increased its application expertise in 2016.
The Executive Board set the course for a successful future by overhauling the corporate strategy to create “Ambition 2020+”. Wilo intends to remain independent and generate faster profitable growth. The issues of growth and digitalisation were more closely and specifically incorporated into the corporate strategy in 2016. To this end, the Executive Board defined eight growth initiatives and already got them off the ground in 2016. In addition, the Executive Board formulated its clear ambition to lead Wilo on the journey to becoming a digital pioneer in the pump industry. The Wilo Group hopes to achieve this both by being its customers’ go-to partner and problem solver with innovative digital products and by setting standards with the digitalisation of its value chain. The Wilo Group made tangible progress towards this aim in 2016. This is demonstrated by the advances in the company’s digital transformation and the market success of innovative concepts and products. The Wilo Group will use the WiloStratos MAXO to further substantiate its claim to be the digital pioneer in the pump industry.
The Executive Board considers the economic situation of the Wilo Group to be highly stable and sustainable. This assessment is based on the results in the consolidated financial statements and the separate financial statements of WILO SE for 2016 and takes into account business performance up until the preparation of the 2016 Group management report. At the time of this Group management report being prepared, business performance in early 2017 is in line with the Executive Board’s expectations.