Management report 2019 This report covers the annual result of the Grundfos Group, Grundfos Holding A/S, and its affiliated companies. To read the majority owner’s annual report, please visit the Poul Due Jensens Fond’s website, www.poulduejensenfoundation.com. 2019 was a record-breaking year for Grundfos. Our earnings and cash flow were the best ever. We recorded the highest ever employee motivation and satisfaction. We repeated very high customer loyalty and satisfaction results. We continued to reduce our own water and energy footprint. We played an instrumental part in bringing water access to approximately 850 thousand people in close collaboration with our partners. Challenging market conditions Despite challenging market conditions, our net turnover grew 2.2% over 2018 when measured in local currencies. Following an appreciation in selected currencies in 2019 versus 2018, the growth measured in DKK landed at 3.0%, bringing net turnover to DKK 27.5bn. Our core European markets demonstrated solid growth throughout the year, and we also experienced growth in the large markets in China and the Americas, although at lower levels than in 2018. Our strategically important global service business continues to show solid growth, and our successful focus on improving profitability in our Heating, Ventilation, Air Condition (HVAC) OEM business, delivering pumps to residential HVAC appliances, has resulted in a flat sales development. In Asia, we have been impacted by the decline in capital investments, which, in turn, has lowered demand among our customers within the machine tooling business. The DAB branded business has delivered another year of solid growth. Record-breaking profitability and cash flow In 2019, we generated Earnings before Interest and Tax (EBIT) of DKK 2,791m, which is an improvement of DKK 391m (up 16%) over 2018. When adjusting for non-performance related items, including costs for our employee share programme and restructuring costs, our "performance EBIT" totalled DKK 2,926m. Performance EBIT has grown 19% over 2018, and it is the highest performance EBIT delivered in Grundfos' history. Performance EBIT/net turnover stands at 10.6%, thereby meeting our ambition of exceeding 10% return on sales at the latest by 2020. The general improvement in the stock markets in 2019 has resulted in income on Grundfos’ securities portfolio and securing a positive net financial income for the year of DKK 168m compared to a loss of DKK 74m in 2018. At the end of October 2019, the Grundfos Group repaid a loan with the Poul Due Jensens Fond settling most of the loan repayment by transfer of the securities portfolio held by the Grundfos Group. For this reason, the Grundfos Group end of 2019 has significantly reduced its securities portfolio and its loans from affiliates compared to the 2019 opening balances. Profit before Tax (PBT) ended at DKK 2,959m up DKK 633m over last year. Cash flow from operating activities in 2019 was DKK 3,947m, which is the highest cash flow from operating activities in company history. The strong cash flow is a result of the strong operating result in combination with diligent working capital management. Net investments for the year stand at DKK 1,236m. The free cash flow (before purchase and sale of securities) ended at DKK 2,711m, which also is record-breaking for Grundfos. A solid cash flow generation is critical for our independence and our ability to invest in realising our strategic ambitions. A solid balance sheet gives us the strength to make long-term decisions without risking our financial independence. Our equity ratio at the end of 2019 stands at 68.1%. Delivering on the Strategy 2020 ambitions In 2015 we launched our Strategy 2020 including five Group KPIs as measures of success. With 2019 past us, we can take final stock of how we met these Group KPIs. The five Group KPIs in the 2020 Strategy were: • Employee motivation and satisfaction • Customer loyalty • Sales growth • Return on sales (Performance EBIT/Net turnover) • Return on Capital Employed Further below, we will introduce the new strategic KPIs set out in the Grundfos Strategy 2025. The result of our 2019 survey on employee motivation and satisfaction showed an overall satisfaction score of 75, up two points over 2018. The 75 score is the best result ever measured across the Group and is considered a strong performance for an industrial company of our size. Already in 2018, we exceeded our 2020 ambition on customer loyalty reaching a recordhigh score of 88 against our 2020 target being 86. In 2019, we repeated this score, which cements our close and trusted relationship to our customers. Our ambition on sales growth was to outgrow the market with a minimum average growth rate over the period of 3%. With a 2.2% sales growth in 2019 the year in isolation was below target. Seen over the strategy period (2016-2019), the average growth rate is 3.6%, i.e. above target. On profitability, our ambition was to reach a 10% performance EBIT/Net turnover by 2020. With a 10.6% performance EBIT/Net turnover in 2019 we have met our ambition, thus giving Grundfos a strong starting point for the new strategy period. ANNUAL REPORT 19
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