REPORT ON EXPECTED DEVELOPMENTS

According to the forecasts made by the International Monetary Fund (IMF), the global economy is expected to grow by 3.7 % in 2014. Taking the IMF’s estimates into consideration, we have assumed in our planning that the industrialised countries will see slightly accelerated growth of 2 % in the current financial year. It is also assumed that the euro zone will once again come out of recession and grow by 1 %; for the German economy, the forecast for gross domestic product is +1.6 %. Provided that the global economy continues to recover, it is estimated that the emerging countries will achieve economic growth of 5.1 %. However, the political development in Russia and Ukraine must be taken into account.

The information provided by the German Engineering Federation (VDMA) suggests that demand in our sector will improve around the world. It estimates that global sales revenue for machinery will increase by 5 % in real terms. It is expected that the sales revenue for German manufacturers of pumps, systems and industrial valves will increase by just 1 %, although this is considerably lower than the overall forecast published in December 2013.

We are planning significant business growth during the current financial year under these economic conditions. A higher order intake in the general business for standard pumps and valves will, along with more service orders, result in a short-term increase in sales revenue. On the other hand, we assume that a potential improvement in the order situation for our project business will not be reflected in sales revenue before 2015, as he delivery dates for pumps and valves for larger projects in the plant engineering sector are one to several years in the future.

PUMPS

We will continue to develop our business for pumps and related automation products during the current financial year. Other activities include trying to increase the volume of orders from the chemical and petrochemical industries. A contributing factor will be the introduction of several pump ranges, including technically optimised magnetic coupling pumps and canned motor pumps.

To further increase our volume in the general business, we are targeting this sales area more closely with the support of the sales organisation that was introduced at the start of the current year. In doing so, we shall focus upon countries where we have been successful in particular in the project business in the past. Activities to encourage the sale of standard pumps and valves include production engineering and logistics projects, for example in countries such as China.

To prepare for the expected growth in the mining sector, we will expand our foundry capacities at our US subsidiary GIW Industries, Inc. This will enable us to manufacture and machine larger and heavier pump parts. Through technical developments and by expanding our product range, such as by adding cyclone separators, we want to tap into the mining engineering market and provide greater added value.

The order situation for our multistage high-pressure pumps, as used primarily by customers in power plant engineering, will at best see a slight improvement during the current financial year.

We will be in a position to benefit from the continuing trend towards greater energy efficiency for pumps and motors. To exploit this to our best advantage, in 2014 we are introducing the improved KSB SuPremE high-efficiency motor to our customers, along with the new-generation PumpDrive variable speed system, for which we procure vital components from our Italian subsidiary REEL s.r.l.

Due to technical similarities with our pumps, we are also producing mixers that are used in biogas plants, for example. We have entered new ground in 2013 with a “flat rate” for mixers. In return for a monthly fee, we assume technical functional accountability including servicing and maintenance. We anticipate increasing demand for this customer-friendly solution that enables owners / operators to save investment costs.

In view of these prospects, we expect overall moderate growth for the order intake and sales revenue in the Business Unit Pumps.

VALVES

In the valves market we anticipate that the order situation for our power plant globe and gate valves will continue to be challenging due to low demand. There are good prospects for cryogenic valves for shutting off liquefied gas. Asia continues to be our most important market in this area, and is served by our South Korean subsidiary KSB Seil Co., Ltd.

Our sales realignment will make it easier for us to expand the general business for standard valves in 2014. We expect to see a significant increase in demand especially in Europe and Asia that we will serve through our sales units, field sales and distributors. We will be able to quickly supply our customers with the products they need through our production facilities in Europe, Asia and the Americas.

Additional opportunities will be tapped with the new ANSI globe and gate valves as well as an extended range of control valves for different applications. In collaboration with a German manufacturer of special valves, we also want to develop our control valve business in Asia.

For the Business Unit Valves, we expect that we will be able to expand our business overall for globe, gate, butterfly and ball valves. We aim to achieve order intake and sales revenue growth in the medium single-digit percentage range.

SERVICE

We aim to expand our service business considerably during the current financial year. The starting point for this initiative is the aftermarket project that we referred to in the previous Annual Report. The aim of the project is to strengthen our position in all Regions through greater presence as well as a comprehensive offering of service and spare parts. This enables us to benefit from the appreciation of many system operators who realise that high-quality service “pays off” over time through shorter downtimes and lower energy costs. We will increasingly market our service portfolio, which extends beyond pumps and valves, through specialist field sales employees. They offer customers the services provided by our stationary repair centres and mobile units for KSB products as well as other manufacturers’ products.

As well as the classic tasks of servicing, repair and spare part supply, our consultancy services are also becoming increasingly important. These include showing interested customers how we can help them save energy by retrofitting their pumps or by installing energy-saving control systems.

The modernisation of pumps and valves in existing systems is one way of avoiding or delaying new investments. These retrofit activities are currently a major focus within our offering.

We see prospects for increasing service sales revenue primarily outside of Europe. The above-mentioned trend towards professional service will attract new customers, especially in Asia. There are good business prospects for mining in Asia and the Americas, where there is a high demand for repairs and spare parts for installed pumps. We wish to retain our prominent market position in the European service market, where we have been the leading supplier for many years.

In 2014 we anticipate a higher single-digit percentage increase in both order intake and sales revenue of the Business Unit Service.

OUTLOOK FOR THE GROUP AND THE REGIONS

We are aiming for moderate to considerable growth in business volumes in all four Regions during the current financial year. The eventualities and contingencies outlined in the subsequent opportunities and risks report must be taken into account however. They can lead to developments of a general nature and also within individual Regions that may have a greater influence on business development than expected.

GROSS DOMESTIC PRODUCT GROWTH

Europe

Our companies in the European market are aiming to achieve moderate growth overall. This is based on the continued expansion of the general business as well as our initiatives to encourage the sale of service and spare parts. Backed up by these initiatives, we will face stable demand in the Central European countries and a trend towards growing demand in Northern and Eastern Europe. According to our estimates, the market situation in most countries within Southern Europe will not change materially compared with 2013.

We envisage higher order potential in the European market, above all in the general industry sector as well as in chemical and process engineering. We aim to achieve above-average growth in these sales areas and thus grow our market share. We expect a revival of the project business through exports from Europe. Furthermore some of the projects that were delayed in previous years in the energy, water and waste water sectors may be awarded.

Our new sales organisation and e-commerce facility will enable us to serve our customers better. To this end, we have added new functionality to our online sales portal aimed at customers in building services as well as a greater number of customers in industry and in the water engineering sector.

Middle East / Africa

In the Region Middle East / Africa we expect economic growth during the current financial year. This will be shaped especially through financially strong countries such as Saudi Arabia and the United Arab Emirates as well as some countries, such as Iraq, where the infrastructure is in great need of being updated. We do not expect to see positive business development in the North African countries that are faced with political upheaval. In contrast, in sub-Saharan Africa we anticipate an increase in our order intake, based on the demand in the mining and water sectors.

From the current perspective, our Group companies in the Region will be able to grow their business overall. Noticeable growth is expected for the service and spare parts business; the expansion of our service centre in Abu Dhabi will be a contributing factor.

Asia

In the Region Asia, demand will increase in the current financial year, although we do not anticipate it to match the growth rates achieved in earlier years. The general slowdown in economic growth in China, stagnating investments in India and weaker business development in South Korea and Indonesia are responsible for the “drag effect”.

We see good sales opportunities in individual sectors however, such as industry and the energy sector in China, the South Korean power plant and shipbuilding sectors as well as the water and waste water industries in Malaysia, Singapore, Vietnam and the Philippines. Following the parliamentary elections in India in May 2014 there is a possibility that the willingness to invest will increase and that the economy will pick up again.

Aiming to better harness the opportunities in the Asian market, we are setting up new sales companies, modernising parts of our product range and establishing a tighter service network. In competition with national manufacturers of pumps and valves, we draw on our capacity for cost-effective local manufacture of products and components. We anticipate overall growth for our Asian Group companies.

Americas / Oceania

As a result of the development in the price of commodities, the mining companies in North America have not planned to make any notable new investments. This also applies to the development of further oil sand resources in Canada. Business at our US subsidiary GIW Industries, Inc. is therefore focused primarily upon the secondary market for service and spare parts at a local level. Its offering includes retrofitting in order to enhance the productivity of its customers’ systems. The power station market in the USA is also not sending out any signals of notable investments in new fossil-fuelled or nuclear large-scale plants. Opportunities exist where smaller combined gas and steam cycle power plants are being built as a result of lower natural gas prices.

In 2014, in South America, we will continue to expand the general business with pumps and values as well as the service and spare parts business. Both have good growth potential in our view. Opportunities for orders are presented through projects in the mining sector as well as the oil and gas sector where our projects include the equipping of offshore drilling platforms. The outlook for the water and waste water market is also expected to be better than in 2013. We are setting up our own company in Colombia during the current financial year, in addition to our businesses in Brazil, Argentina, Chile and Peru.

Mining remains the driver of the Australian economy. Even if commodity prices are not expected to produce any notable expansion in this sector, we do anticipate comparatively significant growth in orders for our products and service offerings there in the current year.

GROSS DOMESTIC PRODUCT GROWTH IN THE BRIC COUNTRIES

SUMMARY OF EXPECTED DEVELOPMENT

Despite economic uncertainties we see good opportunities to improve our volume figures during the 2014 financial year in all three Business Units. In the Business Unit Pumps we are expecting a considerable increase in order intake and a slight increase in sales revenue compared with the figures for 2013. It is anticipated that earnings before interest and taxes (EBIT) will fall slightly short of the prior-year figures as a result of the difficult sales revenue situation that still prevails in the project business. Compared with the previous year, we envisage marked growth in the order intake for the Business Unit Valves, a slight increase in sales revenue and a substantial improvement in EBIT. In the Business Unit Service we are aiming for significant growth for all three key indicators.

For the Group as a whole we estimate considerable growth in order intake and moderate growth in sales revenue compared with 2013. Earnings before taxes (EBT) are also expected to increase moderately, so that the pre-tax return on sales for 2014 will increase in a similar manner. The net financial position is expected to improve to around € 200 million.

In order to increase the operative income level of KSB AG, in 2014 we will consequently pursue the measures that were initiated at the end of 2013 to improve earnings. As well as continuing our cautious investment policy and keeping a sharp focus on the development of structural costs, we will reduce our workforce by approx. 250 employees through a socially responsible early retirement programme.

The forecast horizon for the above-mentioned information and statements is the 2014 financial year. We are not aware of other important influences that extend beyond this period.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements and information that are based upon the assumptions of Management. They express our current forecasts and expectations with regard to future events. As a result, these forward-looking statements and information are exposed to risks and uncertainties that lie outside the Management’s sphere of influence. We wish to point out that actual events or results may differ materially from the forward-looking statements and information mentioned, if one or more of the following opportunities or risks, or other opportunities, risks and uncertainties should materialise, or if the assumptions underlying the statements prove to be inaccurate.

The order intake and sales revenue for service and spare parts are expected to grow markedly in 2014.