March 06, 2015
The world’s leading pump manufacturer, Grundfos, is being challenged by intensified competition, low growth in the European markets and unfavourable currency exchange rates in 2014. High growth in for instance the United States and China strengthens the global market position, but there is a continued decline in profitability. A new strategy is to reverse this trend.
In 2014, the Group experienced a growth in turnover of 5.7 per cent, measured in local currency. This has strengthened Grundfos’ global market share. Compared to 2013, the year was characterised by negative impacts of currency movements, which was particularly evident during the first six months of the year. Overall, the effects of currency movements have reduced net turnover by 4.1 per cent, which means that sales growth in DKK amounted to 1.6 per cent, resulting in a total turnover of DKK 23.6 bn.
“The overall growth is satisfactory, given that a number of markets were characterised by low growth. We have maintained and probably improved our global market position, even though competition has intensified, especially in Asia. But the growth and profitability of the group measured in Danish kroner is disappointing”, says Group President Mads Nipper.
More than half of the turnover comes from Europe, and is therefore considerably influenced by the European market trends. A generally low growth in the European economies resulted in modest growth rates for Grundfos.
“Our important and largest market, Germany, showed a positive growth during the first six months, but took a negative turn during the second half. For the year as a whole, it meant a negative growth, for instance because the market for circulators still does not show the expected sales growth. Besides this, our sales and profitability have been negatively influenced by the development in Russia, which is also one of our main markets. Here, several years of impressive growth has been replaced by deterioration. Despite this, our organisation in Russia has pulled through very well. The economy in Southern Europe is still weak, which has resulted in low or no growth in these countries. But fortunately there are also bright spots, where we have managed to deliver a solid growth. This goes for, for instance, France, Great Britain, Poland, Hungary and Denmark”, explains Mads Nipper.
For some years, Grundfos has worked hard on strengthening its position in the United States. In 2014, a growth equivalent to 11 per cent in local currency has been reached, which, like the achieved growth rates in South America, was above expectations. The Chinese market grew with approximately 9 per cent in 2014. The establishing of sales offices in Central and Western China shows positive results. During the last six months of 2014, the growth, however, decreased due to the slowdown in the Chinese property market and it will be a challenge maintaining the growth rates in the years to come.
Economic independence is one of Grundfos’ fundamental values. The solidity continues to be strong, and has risen to 68.1 per cent - from 67.0 per cent in 2013. The Group holds interest-bearing deposits of DKK 2.7 bn.
The profitability has declined during the last few years, and unfortunately the trend continued in 2014. The result before tax amounted to DKK 881 mill. - compared to DKK 1,475 mill. in 2013. In particular lower margins due to intensified competition, unfavourable currencies developments and an unfavourable geographical sales mix affected the profitability negatively. In addition, a further increase in fixed costs worsened the operating profit. Finally, the result before tax has been negatively influenced by one-off restructuring costs as well as write-downs totalling DKK 224 mill.
Irrespective of this, the profitability is not satisfactory.
The trend from the previous years’ meant that the Board of Directors found it necessary to make changes to Group Management and the business strategy. Mads Nipper joined the company as new Group President on 1 August 2014, and a new Group Management has been put together, consisting of seasoned executives from within the company and new people recruited externally. They have implemented a number of initiatives to improve the Group’s profitability while at the same time securing financial transparency, greater decision-making-power and a faster pace in implementing decisions. A new strategy will make sure that the organisation’s full potential is utilized.
In January 2015, the Board of Directors approved a new 2020 strategy for the Group. It is to secure clear and shared ambitions, reduced organizational complexity, and to prioritise the business areas and markets and map out the most essential strategic initiatives in strengthening competitiveness towards 2020.
“The foundation of the strategy is our existing purpose and values, and it confirms that Grundfos continues to be characterised by strong innovation, ground-breaking products and continuing emphasis on sustainability. It is to secure stronger financial results with an ambition to increase the average annual sales with 6 per cent and a significantly higher profitability in combination with a continued high customer loyalty and employee satisfaction”, Mads Nipper tells and continues;
“We have also identified a number of strategic focus areas: We need to maintain a global leadership in selected product segments through distinct prioritisation, we need to strengthen our end-to-end supply chain to provide us with competitive advantages, we need to develop a strong business in delivering services, we need to secure and maintain a competitive cost base, and we need to strengthen our ability to collaborate across functions and geographies through a culture that is customer-focused, cost-conscious and responsible. Altogether some great ambitions and challenges, but I am convinced that we will be successful”, Grundfos’ Group President concludes.
The Group’s goals and expectations for 2015 are a moderate growth in sales, but first and foremost an improvement in profitability.