Factors affecting our Business

Our business around the world depends on the demand of our customers for industrial trucks, which in turn depends to a large extent on general economic conditions in the countries, regions and localities in which our customers operate, as well as the economic conditions that affect their customers. When general economic conditions improve or deteriorate, production generally and the demand for new trucks specifically tend to show corresponding movements, particularly in those industry sectors or geographic areas which are most affected by such changes. Such changes, particularly when they are widespread and pronounced, can therefore materially affect our results. For example, our results were negatively affected by the global economic and financial crisis in 2008 and 2009, primarily because our customers postponed the replacement of their existing trucks in that period of time which led to a significant decrease in orders of new trucks. We believe that our business has become more resilient to economic downturns due to the increasing share of our service revenue which remained relatively stable during the global financial crisis and achieves higher EBIT margins than the revenue from the sale of new trucks. Due to an installed base in the global market of more than one million trucks, we significantly increased the revenue contributions of our high-margin service offering (which includes after sales services with spare parts, repairs and maintenance, used truck sales, short-term rentals, sales financing, and fleet management). The relatively stable revenue of our service offering was able to partially off-set the cyclicality of the new trucks business in recent years. However, in 2009 we observed that deteriorations of global economic conditions can lead to a lower utilization of installed trucks resulting in a decline of demand for our service offering. Thus, if economic changes are pronounced and/or long-lasting, such as the global financial crisis and subsequent recession that began in 2008, such changes can also have a significant impact on our service business.

Between 2010 and 2012, our number of new trucks sold grew by average 8.0% each year, compared to an increase of global GDP at a compound annual growth rate (“CAGR”) of 2.7% (Source: IMF, 2012). Meanwhile, the share of revenue we generated in the strong growing markets Asia, Eastern Europe, South and Central America increased from 22.0% in 2010 to 24.4% in 2012. We aim to further increase the share of our revenue generated in such markets, especially our target growth markets like China, Brazil and Eastern Europe. The rising revenue share of sales in markets with strong growth rates allowed us to achieve growth rates in revenue above the growth of the average global GDP. In the period between 1980 and 2012, new truck sales have grown globally 1.4 times faster than average global GDP (Source: WITS/FEM for increase of truck sales and IMF 2012 for GDP).

We have successfully developed, implemented and executed various restructuring and redesigning plans since our spin-off from Linde AG in December 2006. The focus of these measures has been on improving capacity utilization, optimizing our global production footprint and on shifting workforce to places with advantageous working conditions. During the time period from 2010 to 2012 we closed six plants in total. This consolidation of our plants in Europe has enabled us to reduce our fixed costs and has increased our capacity utilization levels in our European production facilities, which will result in higher economies of scale and increased production flexibility with beneficial effects on our profitability. Furthermore, we announced in February 2013 the sale of our container handling business in Merthyr Tydfil, United Kingdom to Konecranes. Furthermore, our expansion into growth markets like China, Brazil and India improved our global presence, due to increased localization, including research and development, trained employees for our key operations, lower labour costs and a reduction in shipment costs. We opened a new production plant in Indaiatuba, Brazil, in order to expand our locally produced portfolio of E-trucks and warehouse trucks to IC-trucks. In addition, we have upgraded our plant in Xiamen, China to full line production. We also further expanded our local product portfolio in India by opening a new plant in Pune, India, to increase our production capacity to meet future demand. Our expansion into growth markets has also increased our low-cost country (countries other than countries from the EU-15 area, EFTA, USA and Japan) sourcing share from approximately 22% in 2008 to 26.2% of our total purchasing volume in 2012. We plan to continue with our current purchasing strategy to integrate our strategic suppliers in the supply chain management, increasing volume flexibility and localization of components of production in growth countries. This local sourcing strategy has lowered our supplier concentration. Our top 10 suppliers only amount to only 18.6% of the total purchase volume.

From 2006 until the crisis in 2009 we were able to steadily increase the Adjusted EBIT margin. Following a negative EBIT margin in 2009 during the last three years we increased our Adjusted EBIT margin from 3.9% in 2010 to 9.3% in 2012. The reasons for this primarily include cost reduction measures (as described above), growing revenue and higher market shares in key growth markets, benefits from economies of scale due to high production capacities and synergies within the Group, growing service business with higher margins and our ability to charge premium prices for our products. This is due to the fact that we are a technological leader and can offer a high degree of customization. Furthermore, certain of our products have lower costs of ownership compared to products from our competitors. Through the selection of customized options in our truck orders, we can specifically address the diverse needs of our customer base. This has led to a high degree of customer satisfaction and an extensive range of possible options of product configuration that we are able to offer our customers. The reduction of total cost of ownership for our customer is a result of lower operating costs due to the efficiency of our trucks and their ergonomic design, lower service costs due to reliable and robust technology and our highly qualified service technicians operating from a global network of service stations and lower energy costs due to the high energy efficiency of our trucks and finally higher residual value of our trucks.

The increases and decreases in our inventories, trade receivables and trade payables largely correlate with the increases and decreases of the volume of the products we sell. As a result, both our trade receivables and payables are subject to seasonality, especially at the end of the year. In addition, we have undertaken initiatives to reduce our trade working capital in our business, especially by improving our inventory management process and collecting our trade receivables more efficiently. As a result, our trade working capital (inventories plus trade receivables minus trade payables) remained stable in absolute terms between 2010 to 2012 and decreased as share of revenue from 18.7% in 2010 to 11.2% in 2012, which was attributable to the transfer of inventories to Linde Hydraulics KG and to improved receivables collection. This reduction of trade working capital resulted in an improved cash flow from operating activities.