2 Sto at a glance Sto Group Changes in % 09/08 Sales revenues % Germany % Non-Germany % Capital spending (excluding financial assets) % Depreciation/amortisation (excluding financial assets) % EBITDA % EBIT % EBT % EAT % per ordinary share ( ) per preference share ( ) Cash flow from operating activities % per share ( ) Total assets % Equity % in % of total assets Employees (year end) 3,813 3,866 3,913 4,056 4,155 4, % of which Germany 2,243 2,231 2,221 2,286 2,317 2, % of which non-germany 1,570 1,635 1,692 1,770 1,838 1, % Sto AG Changes in % 09/08 Sales revenues % Export ratio (%) Capital spending on property, plant and equipment % in financial assets % Depreciation/amortisation % Result of ordinary activities % Annual net profit % Cash flow from operating activities % Dividend/bonus per ordinary share ( ) / / / /2.06 per preference share ( ) / / / /2.06 Total assets % Equity % in % of total assets Employees (year end) 1,927 1,918 1,897 1,946 1,960 1, % (Figures in EUR million) Rounding of amounts may lead to minor deviations in totals and in the calculation of percentages in this report.
3 Sto AG 2009 Annual Report Foreword 2 Report of the Supervisory Board 4 Corporate Governance Report 8 Management Report Sto Group (IFRS) 12 Sto Share 40 Sustainability and Corporate Social Responsibility 44 Income statement, statement of recognised income and expenses, balance sheet, notes Sto Group (IFRS) 49 Audit certificate, Sto Group 117 Responsibility statement by the legal representatives of the Sto Group 118 Calendar of events, publisher's details, photographic credits 120 Picture caption for title page: The new insulation material plant in Lauingen produces top-quality polyurethane foam. This enables Sto to reinforce its core field of activity: facade insulation.
4 Sto AG Foreword Foreword Jochen Stotmeister, Chairman of the Board of Directors Dear Shareholders, Sto succeeded in asserting itself in 2009 in very difficult conditions, once again delivering compelling proof of its strength. While we were also impacted by the global recession, resulting in a decline in Group sales by 2.3 %, to EUR million, this shortfall turned out to be considerably less substantial than we had feared at the beginning of the year on account of the global economic and financial markets crisis. Essentially, there were two reasons for this: First of all, business with composite thermal insulation systems in countries that are particularly ecology-minded, where the deployment of such products is financially subsidised, turned out better than expected. Second, the usual slowdown in business in the fourth quarter turned out to be less severe than in previous years due to milder weather conditions. Thanks to these positive factors, it was possible to offset the partly significant shortfalls sustained in the USA, the United Kingdom, Spain as well as northern and eastern Europe to a considerable degree. The solid turnover volume simultaneously served as a basis for a satisfactory earnings trend. Another factor was that in the wake of the economic and financial markets crisis, at the beginning of 2009, we launched additional cost-cutting measures and implemented these consistently even when initial economic stabilisation tendencies began to materialise. As a result, we were able to achieve impressive savings last year. For this reason, the Group's operating result (EBIT) declined only moderately, by 1.1 %, to EUR 82.3 million. Owing to improved net financial income and a lower tax rate, net profit for the year was up by 7.3 %, to EUR 55.6 million. The financial and asset position also reflected positive trends: cash inflows from operating activities increased by 29.4 %, to EUR million, the volume of cash and cash equivalents once again exceeded our financial liabilities at the end of December, and the equity ratio in the consolidated balance sheet came to 56.4 % (previous year: 53 %). On this solid basis, at the Annual General Meeting on 15 June 2010, the Board of Directors and Supervisory Board proposed to leave the dividend payout at the previous year's level. Accordingly, our shareholders will receive an unchanged dividend of EUR 0.31 per preference share and EUR 0.25 per ordinary share plus an unchanged bonus of EUR 2.06 in each case. Notwithstanding the current influential factors that played a part in 2009, the success achieved during the last financial year also serves to confirm our strategy. We do not allow ourselves to be influenced by short-term considerations; our corporate development is based on a long-term perspective on our part. We are reaping today what we sowed as early as the end of the 1980s by consistently taking account of ecological and social aspects as part of our corporate policy. This approach is reflected in our corporate mission statement "Building with conscience", in which we commit ourselves to designing the world in which we live in line with environmental requirements and our needs as human beings. When we drew up this mission statement, over 20 years ago, we were one of the first companies in the industry to take account of sustainability in its strategy. Today this topic is of immense social and economic relevance. In 2009 we continued to develop our 2
5 Foreword Sto AG mission statement and adjusted it to the general conditions and fundamentals that have also undergone rapid change in the construction industry: the vision and mission were updated and the success factors specific to Sto were defined. The new structure of values represents a final and binding framework for action in the future and provides guidance for responsible corporate governance. Accordingly, the revised mission statement simultaneously represents an initial key step to prepare Sto AG in good time for the forthcoming generation change in the company's management. We plan to entrench and further concentrate on the topic of responsible corporate governance within the Group. This is why we joined the "Global Compact" economic initiative under the auspices of the United Nations at the beginning of The companies involved in this worldwide pact have made a public and verifiable commitment to respect and protect human rights, to meet international labour standards, to fight corruption, and to implement forward-looking, comprehensive environmental protection policies. In order to document the activities we are already carrying out in these fields, we prepared a Sustainability Report for the first time, which was was included in the current Annual Report. Responsible corporate governance and sustainability are integral elements of our long-term oriented strategy, which we plan to continue to implement consistently in the future. Moreover, key elements are intensive research and development activities, the reinforcement of the Sto Group's expertise, the ongoing internationalisation and the extension of the second distribution channel, dealerships, via which we plan increasingly to sell products clearly delineated from our core field of activity. We are convinced of our ability to continue our earnings-oriented growth course on the basis of this balanced forward strategy in the forthcoming years and simultaneously do justice to our social responsibility. Moreover, the operational and financial foundations of Sto AG are strong enough also to overcome cyclical lows without sustaining damage. For the financial year 2010, we anticipate consolidated sales to rise by roughly 2 % to about EUR 946 million, which means we would be reaching the level of fiscal 2008 before the global economic crisis. We anticipate renewed growth especially in Germany, France and the Asian markets. In northern Europe, we assume that we will see a moderate economic recovery, from which our subsidiaries are likely to benefit as well. In eastern Europe, sales of Sto products should be roughly at the previous year's level. In contrast, a further decline in turnover is anticipated in North America. Of course these forecasts are subject to substantial uncertainties as the economic upturn still remains fairly shaky. Climatic effects cannot be forecast either. Nevertheless, we are confident of our ability to reach our defined turnover target. Notwithstanding the increase in turnover, we will not reach the 2009 level of Group EBIT in the year This is due in particular to the disproportionate rise in material and personnel costs in relation to the volume of business. One reason for this is the enlargement of our Group workforce, a strategy adopted by us to adjust capacities in the individual countries to the higher volume of business expected. To some extent, we are catching up with measures that had been postponed in 2009 in view of the economic crisis. Moreover, the pressure on prices will also continue to grow in our industry. The exemplary commitment and immense know-how of our employees make a decisive contribution to Sto's successful performance. On behalf of the Board of Directors, I would like to thank all our employees and executive staff for their outstanding service and dedication during the last financial year. Sincerely, Jochen Stotmeister Chairman of the Board of Directors 3
6 Sto AG Report of the Supervisory Board Report of the Supervisory Board Members of the Supervisory Board Fritz Stotmeister, Öhningen Honorary Chairman Dr Max-Burkhard Zwosta, Wittnau, auditor and tax consultant Chairman (pictured) Helmut Göbeke-Teichert*, Marbach, Trade Union Secretary of the IG BCE Deputy Chairman Helmut Hilzinger, Willstätt, Managing Shareholder of Hilzinger GmbH Mag. Dr Heimo Scheuch, Vienna/Austria, CEO of Wienerberger AG Peter Zürn, Westernhausen, member of the Management of the Würth Group Prof. Dr-Ing. Klaus Sedlbauer, Stuttgart, Director Fraunhofer Institute Charles Stettler, Stäfa/Switzerland, member of the Board of Directors of Zürcher Kantonalbank Holger Michel*, Burgdorf, Trade Union Secretary of the IG BCE Melitta Menstell-Cooper*, Stühlingen, Chairperson of the Central Works Council and Chairperson of the Works Council Weizen at Sto AG Erhard Röhl*, Wiesbaden, Technical Coordinator of Sto AG Werner Trunz*, Donaueschingen, Head of Organisation and IT of the Sto Group Klaus Eigenstetter*, Bonndorf, Personnel Officer at AG * Employee Representatives 4
7 Report of the Supervisory Board Sto AG Dear Shareholders, In 2009, a year that was overshadowed by the international financial markets and economic crisis, the performance of Sto AG was gratifyingly stable. Above all, the successful business trend in defiance of difficult fundamentals is the result of a forward-looking and sustained business strategy. However, a key contribution was made by Sto's workforce, again overcoming their daily challenges with immense commitment and dedication. The Supervisory Board wishes to express its gratitude to all employees and executive staff for their exemplary service. Work of the Supervisory Board The Supervisory Board of Sto AG again carried out its tasks assigned by statute law and the articles of association with immense dedication in The new and efficient structures we had introduced in 2008 in line with the recommendations of the German Corporate Governance Code proved to be highly successful in practice. In particular, the specialised committees that dealt with complex factual issues outside the actual Supervisory Board meetings and processed these for the full Board proved to be beneficial. When appointing committee members we are able to draw on the vast knowledge of the members of the Supervisory Board, who are all proven experts in their respective fields. The Supervisory Board again dealt at length and intensively with the Sto Group s situation in 2009, continually assisted the Board of Directors in an advisory capacity and monitored the Company s management. The Board of Directors briefed the Supervisory Board on a regular, timely and comprehensive basis on corporate planning, operational business trends, the Group's situation including the risk position and risk management as well as on compliance at Sto. Departures of business trends from defined plans and targets were explained to us in detail, and the company s further strategic development and orientation were coordinated with us. All major issues affecting the development of the company were discussed openly and in great detail during Supervisory Board meetings. The required information was provided to the Supervisory Board mainly in the form of comprehensive written monthly reports. For business transactions requiring the approval of the Supervisory Board, the Board of Directors made available the documentation specific to the issues at hand, which provided the basis for detailed discussion and the subsequent decision-making process. During all decisionmaking processes, the Supervisory Board and the Board of Directors observed the principles of corporate governance at all times. The Chairman of the Supervisory Board was also in regular contact with the members of the Board of Directors outside the official meetings of the Supervisory Board. Amongst other things, he attended several strategy and other meetings of the Board of Directors. Moreover, in numerous face-to-face meetings and telephone calls attention was focused above all on the strategy, business development and risk management of the Sto Group. Key issues dealt with during meetings of the Supervisory Board During fiscal 2009, the Supervisory Board held four regular meetings, on 23 April, 29 July, 22 October and 3 December. Amongst the topics discussed on a regular basis as part of these meetings were the current business situation, the effectiveness of the risk management and internal control systems, and strategic issues. This body was always represented by all members, except for one instance in which a member of the Supervisory Board was excused. In addition to these regular agenda items, the first meeting of the year, held on 23 April 2009, also dealt with the audit and confirmation of the annual financial statements for fiscal
8 Sto AG Report of the Supervisory Board of Sto AG, and the audit and approval of the consolidated annual financial statements of the Sto Group. Furthermore, we dealt at length with the risk report, which was briefly explained and declared to be complete by the auditor. The Supervisory Board concurred with the auditor s assessment. Next, the Board of Directors presented the planning activities for the financial year 2009, to which we also agreed without any reservations. On 29 July 2009, the Board of Directors explained possible measures to develop the market in Central and South America. In addition, the Supervisory Board obtained information on the current status of the project intended to clarify the requirements for the introduction of a central Group treasury. On 22 October 2009 the Supervisory Board dealt with the consequences arising from the amendments to the German Corporate Governance Code and entry into force of the Accounting Law Modernisation Act (Bilanzrechtsmodernisierungsgesetz BilMoG). In this connection, amongst other things, we decided to adopt additional measures to monitor Group-wide risk management activities. In addition, the Supervisory Board affirmed the importance of responsible corporate government and its support for the objectives of the Code. Departures from the Code arising from the specific requirements of an SME have been defined in the Declaration of Conformity pursuant to Section 161 of the German Companies Act (AktG). This document is permanently available for viewing at the Sto Internet web site A key agenda item on 3 December 2009 was the renewal of the contract with Mr Gerd Stotmeister as Chief Technical Officer and his appointment as Deputy Chairman, effective 1 January Beyond that, the Supervisory Board dealt with the topic of innovations at Sto. There was a general consensus that the need to secure technology leadership represents a key prerequisite for the extension of the Group's market position. Accordingly, the R&D Division will continue to play a strong role at Sto in future. Work of the committees The Supervisory Board of Sto set up the following committees: The Finance Committee uses monthly figures in a regular and detailed analysis of emerging trends in key financials, particularly sales revenue and earnings. Capital investment projects are also pre-audited. In 2009, the Finance Committee met according to schedule each day preceding the official Supervisory Board meetings. The Audit Committee meeting was held on 22 April During this meeting, the annual financial statements for Sto AG and the Sto Group for fiscal 2008 were discussed with representatives of the auditor and subjected to a preliminary review. The Personnel Committee dealt with contractual matters relevant to the Board of Directors. The committee met twice during Topics were the appropriateness of remuneration paid to the Board of Directors after entry into force of BilMoG and the contract renewal for Mr Gerd Stotmeister. It was not necessary to convene the Arbitration Committee pursuant to Section 27, paragraph 3 of Germany s Co-determination Act (MitbestG). Audit of the annual financial statements 2009 for the Sto Group and Sto AG At the Annual General Meeting of 16 June 2009, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Stuttgart, were appointed as auditors for fiscal Ernst & Young GmbH assured the Supervisory Board in writing that there were no circumstances that could impair their independence as auditors of the annual financial statements. We subsequently commissioned Ernst & Young GmbH to audit the annual financial statements of Sto AG and the 6
9 Report of the Supervisory Board Sto AG Sto Group, the management reports and the dependent companies report of the Board of Directors pursuant to Section 312 of the German Companies Act (AktG). The annual financial statements and the management report of Sto AG prepared by the Board of Directors on the basis of the accounting regulations of the HGB (German Commercial Code), the consolidated annual financial statements and the management report of the Sto Group prepared on the basis of International Accounting Standards, and the dependent company report of the Board of Directors in accordance with article 312 of the German Companies Act (AktG) were audited by Ernst & Young GmbH and were each given an unqualified audit certificate. The management reports provide an accurate depiction of the business and financial situation of Sto AG and of the Sto Group. The opportunities and risks of future development are described accurately. The audit by Ernst & Young GmbH was performed pursuant to article 317 of the German Commercial Code [HGB], in accordance with the generally accepted auditing principles defined by the German Institute of Chartered Accountants (IDW). Moreover, the auditor confirmed the effectiveness of the risk management and internal control system. The annual financial statements of Sto AG and the Sto Group, the management reports, the dependent company report of the Board of Directors and the audit reports prepared by Ernst & Young GmbH were distributed to all the members of the Supervisory Board in good time and discussed in detail in the presence of the auditors at the financial meeting of the Supervisory Board on 21 April On the basis of our own examination of the annual financial statements, the management reports and the dependent company report of Sto AG, we approve the audit report and raise no objections to it. The auditors from Ernst & Young GmbH issued the dependent company report with the following audit certificate: Following our audit, which we carried out in conformity with professional standards, and subsequent assessment, we confirm that the factual information in the report is correct. The Supervisory Board approved the annual financial statements prepared by the Board of Directors; accordingly the financial statements of Sto AG have been confirmed. We agreed to the proposal by the Board of Directors to table a motion at the Annual General Meeting to pay out an unchanged dividend. Accordingly, subject to approval at the Annual General Meeting the shareholders will once again be paid a dividend of EUR 0.31 per preference share and EUR 0.25 per ordinary share plus an unchanged bonus of EUR 2.06 per preference and ordinary share, respectively. General economic conditions will remain difficult in fiscal 2010 and again pose substantial challenges for Sto AG. The Supervisory Board would like to wish all employees and executive staff every success in dealing with the tasks that lie ahead. Dr Max-Burkhard Zwosta Chairman d 7
10 Sto AG Corporate Governance Report Corporate Governance Report Responsible corporate governance The Board of Directors and the Supervisory Board of Sto AG are committed to responsible, transparent corporate governance with a long-term view. Adherence to legal and ethical standards, a sound financial policy and a strategy oriented towards achieving sustainability have all been integral parts of our corporate philosophy ever since Sto was established. Corporate Governance at Sto is based on conscientious compliance with statutory rules and regulations, the Company's articles of association, the rules of procedure for the Board of Directors and Supervisory Board as well as the German Corporate Governance Code ("the Code"). Below is our report on corporate governance at Sto in accordance with No of the Corporate Governance Code. This report is simultaneously an element of the statement on corporate governance that can be found on Sto's web site under under "Investor Relations". Sto implements most of the recommendations in the Code. Departures from the Code occur only in relation to matters that conflict with the special nature of medium-sized family-run companies. In these instances, we have adopted individual rules suited to our particular structure. Departures from the recommendations of the Code in the version of 18 June 2009 and the relevant reasons for doing so are explained in the declaration of compliance in accordance with Section 161 of the German Companies Act. The current version is available for download from the Internet. This also applies to legacy statements. Shareholders and annual general meeting At the end of 2009, Sto AG's share capital amounted to EUR million. The share capital was divided up into 4.32 million registered common shares and million preferential bearer shares. Each ordinary share is entitled to one vote at the Annual General Meeting. Preferential shares do not have voting rights but take priority for the purpose of profit distribution and are entitled to a higher dividend. There are no shares with multiple or preferential voting rights. An ordinary general meeting is held once each year. The Board of Directors of Sto AG ensures timely dispatch of all reports and records required by statute law for the Annual General Meeting, including the agenda. These documents are simultaneously made easily accessible on the Company's web site. At the Annual General Meeting, the Board of Directors presents the annual financial statements of the previous financial and comments on key events. Every shareholder is entitled to attend the Annual General Meeting, to address the meeting in relation to items on the agenda and to ask questions about specific topics and to propose motions. Corporate governance/management and control structure Sto AG s head office is located in the southern German town of Stühlingen, which means we are subject to German law. This provides the mandatory legal framework to which our Corporate Governance activities must conform. In particular, the German Companies Act and the Co-determination Act must be adhered to, as well as the numerous regulations of the capital market law. Sto has a two-tiered governance and control structure, which consists of a Board of three Directors and a 12-member Supervisory Board. Accordingly, the management of the Company and the process of monitoring it are strictly separated. Both bodies observe the rules of proper corporate governance at all times. The Board of Directors and the Supervisory Board cooperate closely for the benefit of the company. The Board of Directors of Sto AG, whose current composition is shown on page 114, primarily takes care of the management of the 8
11 Corporate Governance Report Sto AG company and is responsible for its strategic orientation. The Board of Directors coordinates its strategy with the Supervisory Board. In addition, the Board of Directors takes suitable precautions to ensure compliance with statutory rules and regulations and internal corporate guidelines within the Sto Group. The Board's functions also include the preparation of the annual financial statements for Sto AG and for the Sto Group, and the establishment and ongoing development of the risk management system. Detailed information about the risk situation is provided on pages 30 to 35 of this annual report. The members of the Board of Directors are committed to working for the benefit of the Company, and they are subject to a comprehensive no-competition clause. For details of the remuneration of the members of the Board of Directors, we refer to pages 15 and 113 of this annual report, and to the declaration of conformance in accordance with Section 161 of the German Companies Act. Sto's Supervisory Board is composed of representatives of the shareholders and representatives of the workforce in equal numbers, in accordance with the German Co-Determination Act. The current members are listed on pages 114 and 115 of the Supervisory Board report. The key tasks of the Supervisory Board are to monitor and advise the Board of Directors. The Supervisory Board becomes involved in any decisions that are of fundamental importance for Sto AG from the outset. It also defines the obligations for the Board of Directors to notify and report to the Supervisory Board. At Sto, this body is briefed by the Board of Directors on a regular, timely and comprehensive basis about all relevant issues relating to planning, business development, the risk situation and risk management. Departures in the performance of the business from defined plans are discussed. On the basis of the findings of the auditor, the Supervisory Board conducts an inspection of its own of the annual financial statements of the Sto Group and Sto AG. Moreover, the half-year financial report and the interim reports are discussed with the Chairman of the Supervisory Board within the first and second half of the year prior to their publication; the Chairman then coordinates his activities with the other members of the Supervisory Board. The body s various duties are coordinated by the Chairman of the Supervisory Board, who also maintains close contact with the Board of Directors for the purpose of consulting on Sto s business strategy, business performance and risk management on a regular basis. For details of the remuneration of the members of the Supervisory Board, we refer to pages 15 and 113 of this annual report, and to the declaration of conformity in accordance with Section of the German Companies Act. The Supervisory Board regularly investigates ways of enhancing the efficiency of its work procedures. A suitable means for enhancing efficiency are suitably qualified committees. In the periods leading up to the Supervisory Board meetings, these committees deal with complex issues and process the findings in appropriate form for the full Supervisory Board meetings. The Chairperson of the relevant committee constantly provides the Supervisory Board with reports on the committee's work. A Finance, Personnel and Audit Committee were set up at Sto. The need for a Nomination Committee has been dispensed with for the time being since the present members of the Supervisory Board were elected for a term of five years at the Annual General Meeting of 2007 and no immediate fresh election is scheduled to be held. As soon as necessary, Sto's Supervisory Board will set up a Nomination Committee. Transparency To ensure a high degree of transparency, Sto AG provides shareholders, financial analysts, the media and the general public regularly and 9
12 Sto AG Corporate Governance Report promptly with information about the business situation and key events within the company. To this end, we use numerous ways and means, such as the annual and half-year financial reports as well as interim announcements within the first and second half-year. In addition, current topics are dealt with in press releases. All documents are published in parallel on the publication date on the Internet under the URL in the field of Investor Relations. By doing this, we ensure that all target groups are informed at the same time, and that the news is disseminated across the board. As of 2007, these Sto reports can also be retrieved via the electronic companies register. As soon as any insider information directly affecting Sto emerges, we report the information immediately in accordance with the relevant legal provisions, i.e. even outside our regular reporting cycle. All key dates for publications and functions are listed in the calendar of events, which is announced well in advance. The current calendar of financial events, valid from the end of March 2010, is reproduced in this annual report. The current version of the calendar can always be viewed on the Internet. According to Section 15a of the Securities Trading Act (WpHG), members of management and supervisory boards of publicly listed companies have a duty of notification. This means that all executive and non-executive directors at Sto AG must disclose any private transactions involving Sto preferential shares (directors dealings) to the Federal Supervisory Authority for Financial Services (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) and to Sto AG within five working days. No directors dealings were reported in fiscal on these Standards is set out in the notes to this annual report. The annual financial statements of the parent company Sto AG are prepared in accordance with the German Commercial Code (HGB). Both the consolidated financial statements and those of Sto AG are audited by an independent auditing company elected at the Annual General Meeting following a proposal by the Supervisory Board. The nomination proposal is preceded by an independence check in order to ensure that any conflicts of interest that might give rise to doubts concerning the neutrality of the auditor can be precluded from the outset. The auditing company responsible for Sto has issued an appropriate statement. The auditor responsible takes part in the deliberations of the Supervisory Board concerning the annual financial statements and the consolidated financial statements and reports on the key findings of the audit during these accounting meetings. Accounting and auditing of financial statements The Sto Group's consolidated financial statements are based on the International Financial Reporting Standards (IFRS). Detailed information 10
13 Corporate Governance Report Sto AG 11
14 Sto AG Management Report for the Sto Group (IFRS) Management Report for the Sto Group (IFRS) Members of the Board of Directors Jochen Stotmeister, Grafenhausen (centre) Chairman of the Board of Directors, responsible for Marketing and Distribution, Central Services and Personnel Gerd Stotmeister, Allensbach (right) Vice-Chairman of the Board of Directors since , Technology Director, responsible for Process Engineering, Innovation and Logistics Hans-Dieter Schumacher, Tuttlingen (left) Finance Director, responsible for Finance, Controlling, Organisation and Information Technology Fiscal 2009 at a glance Sto Group turnover down by 2.3 %, to EUR million Strong performance of domestic business; foreign operations poor Group operating result (EBIT) amounts to EUR 82.3 million, down by 1.1 % year-on-year Proposed dividend: unchanged dividend and bonus Cash flow from current business activities up by 29.4 %, to reach EUR million Group workforce more or less stable at end-2009, consisting of 4,145 employees Outlook for the year 2010: slight increase in Group turnover and decline in earnings anticipated 12
15 Management Report for the Sto Group (IFRS) Sto AG Business and general conditions Business activity and Group structure Sto specialising in facades With consolidated sales revenues of around EUR 925 million and a workforce of over 4,140 employees, the Sto Group is a highly innovative world leader in the manufacture of products and systems for building facades. Its core business includes external wall insulation systems (EWIS), a segment in which the Group occupies a leading position. Sto produces these composite systems both for facades and for interiors, with a particular focus on ceilings. The principal distinguishing characteristic between the various EWIS options on offer is the type of insulating material used. Materials employed in these applications include mineral wool and polystyrene foam. The "StoTherm Classic" system, for example, consists of the following carefully coordinated component materials: Adhesive, insulation made of polystyrene, reinforcing material, reinforcing mesh and top coat. The Facade Systems business unit focuses on external wall insulation systems, rainscreen cladding systems and facade elements. In 2009, this key product group accounted for 49.7 % of Group turnover. The range of products made by our company also includes paints and plasters for interior and exterior applications, as well as flooring materials and concrete repair products. The professional Sto brand Sto has positioned itself in the market as a supplier of quality products, systems and complementary services incorporating a high level of technological expertise. The range is therefore primarily targeted at professional users such as tradespeople, architects and building development companies. These target groups are served by means of local direct distribution systems, which in Germany still the most important individual market covers virtually the entire country. Sto also offers a comprehensive range of perfectly coordinated services designed to provide our customers with the broadest possible scope for individual design solutions. Successful implementation of this business model has allowed Sto to establish itself as one of the best-known product brands in the industry. Growth driven by internationalisation and innovation Sto has enjoyed decades of virtually continual growth. Our firm focus on internationalisation has played an instrumental role here. Around the world new regional markets have been developed one after the other, simultaneously reducing our dependence on the domestic business. Sto is currently operating in 26 countries, through a network of 29 wholly-owned subsidiaries and manufacturing plants. In addition, we are in supplier relationships with distribution partners in many other countries. Business is currently focused in particular on Europe and the USA. The ongoing development of markets in Asia and China in particular is being pursued with vigour. A further plus for Sto is our great capacity for innovation. The development and successful marketing of numerous groundbreaking innovations has earned our company an international reputation as a pacesetter in facade technology a standing which is confirmed by numerous awards. To consolidate this leading position while also developing new growth markets, research and development are considered core strategic activities at Sto. Further information is to be found in the section "Research and development" Bonding 2 Insulation 3 Reinforcing plaster 4 Reinforcing mesh 5 Top coat The organically bound StoTherm Classic system has a successful track record extending back over more than 40 years. The system is distinguished by its ability to be produced in a wide range of intelligent detailed solutions that can be installed quickly and easily by professional tradesmen. 13
16 Sto AG Management Report for the Sto Group (IFRS) Professional painting, decorating and plastering firms are Sto's most important market partners. They are supplied at local level via a direct distribution system. Clearly defined corporate structure The parent company of the Group is Sto AG, headquartered in Stühlingen. In addition to functioning as the Group s holding company, it is also responsible for German domestic business involving paints, plasters and insulation systems. StoCretec GmbH, located in Kriftel, is responsible for floor coatings and concrete repair products, and StoVerotec GmbH, located in Lauingen, deals in decorative profiles, acoustic and rainscreen cladding systems. The company Südwest Lacke + Farben GmbH & Co. KG, Böhl-Iggelheim, is the Group s specialist for lacquers and varnishes. Foreign business is largely handled by national companies operating independently. A list of all subsidiaries of Sto AG is reproduced in the Notes to this annual report, in Annex 1. Applications in both renovation and construction work Sto products are employed both in the construction of new buildings and in building renovation work. The comparative weighting of these two market segments in individual regions depends on the characteristics specific to each country. In Eastern Europe, for example, construction of new buildings is of much greater importance than are renovations, due to the pent-up demand in this region. In the more mature western economies, both segments contribute roughly equal shares to the volume of the construction sector. Generally speaking, there is a strong correlation between the construction of new buildings and economic cycles, and sales fluctuate in line with prevailing economic conditions. In contrast, demand in the renovation and restoration segment has been relatively steady in recent decades, regardless of economic cycles. The contribution of the renovations business to Sto's consolidated sales volume is well above 50 %. Business management and control system Sto AG is headed by a three-man Board of Directors whose remit includes defining the Group strategy and managing Sto AG, the subsidiaries and other corporate units by setting strategic and operational targets. The Board of Directors also employs key financial figures which are determined and applied uniformly throughout the Group for management, planning and controlling purposes. For the purposes of corporate management Sto makes use of a system that strengthens decentralised entrepreneurial responsibility among local employees and simultaneously boosts transparency within the Group of companies. An essential element of this system is the standardised reporting facility which provides for the uniform continuous recording, consolidation and analysis of business figures worldwide. The key operating ratios we employ are earnings before interest and taxes (EBIT), earnings before tax (EBT), cash flow from current operations and return on equity. In addition to internal ratios, we also monitor key external early indicators as a means 14
17 Management Report for the Sto Group (IFRS) Sto AG of further improving our planning and risk management. At Sto, such indicators primarily comprise economic data and detailed industry information. The reports compiled under this system are submitted directly to the Board of Directors, which then forwards the relevant information to Sto's Supervisory Board. In addition to reporting, management consultations are conducted between the Board of Directors and the executive staff of the subsidiaries on a regular basis. Fundamentals of the remuneration system The remuneration for the Board of Directors consists of a fixed and a variable component, with a marked bias on the variable component. The level of the variable salary component is linked to the earnings situation of the Sto Group. No stock options are granted. The members of the Supervisory Board are provided with fixed remuneration beyond compensation for costs incurred. The applicable rule is that the Chairman is entitled to four times and the Vice-Chairman 1.5 times the amount of the basic remuneration. Strategy The fundamental objective of Sto AG is to strengthen the company s good market position and to expand it in the medium term. In this way we intend to continue pursuing our earningsoriented strategy for growth and increase the value of the company, while observing social and ecological criteria. This will ensure that we remain a strong and reliable partner for our employees, our shareholders and other stakeholders. In pursuit of our ambitious objectives we apply a clear strategy with the following focuses: Intensification of research and development efforts The existing range of products and services is subject to ongoing improvement and the regular addition of new innovations. Effective and reliable products combined with technological advances serve to secure the loyalty of our existing customer base and to win over new customers. Our efforts in this area are also aimed at consolidating our industryleading know-how in the areas of insulation systems and methods. Strengthening the competence of the Sto Group We took timely measures to back up our traditional product range with services such as advice, training and equipment, also introducing coating materials to complement our established products. Together, Sto AG and its subsidiaries possess the most comprehensive integrated portfolio covering all aspects of the facade. In addition to excellent know-how, we also offer our customers broad design scope. We intend to further broaden the fund of expertise within the Sto Group through appropriate measures such as our entry into the insulation technology segment in Continuation of the internationalisation process We will pursue a systematic approach in developing additional regional markets and scaling down our dependency on the German core market. This is to be achieved by expanding our activities in countries in which we already operate and entering completely new markets, always according due consideration to risk aspects. Further development of our second distribution channel The Sto brand is to remain the reserve of direct distributors, in order to maintain our high profile among our customers. This high profile and direct availability constitute an important competitive advantage. An additional distribution channel is currently being developed with the aim of tapping additional sales potential. This involves marketing products through specialised retailers which are clearly distinguished from our core business line. A 15
18 Sto AG Management Report for the Sto Group (IFRS) further advantage here is improved utilisation of our production capacities as a result of the increased product turnover. Consolidation of the sustainability principle Foresight and responsibility have always been integral to the way Sto goes about its business. In order to enshrine the sustainability principle yet more firmly in our corporate culture, we updated our corporate mission statement accordingly in We also signed up to the United Nations' "Global Compact" initiative. The companies participating in this worldwide pact have made a public and verifiable commitment to respect and protect human rights, to meet international labour standards, to fight corruption, and to implement forwardlooking, comprehensive environmental protection policies. According greater consideration to sustainability criteria in all decision-making and business processes will ultimately have a positive impact on the medium- to long-term success of the company. Overview of business performance in 2009 and general statement by the Board of Directors Sto AG showed a satisfactory course of development in the 2009 financial year. While we were unable to escape the effects of the worldwide recession, which were reflected in a 2.3 % drop in consolidated sales to EUR million, the overall impact was not as severe as originally feared. One reason for this was the positive course of business with external wall insulation systems in those countries in which a high level of environmental awareness prevails and the use of such products is subsidised by economic recovery or emission reduction programmes. A second important factor was that the customary lull in business in the fourth quarter was less pronounced in 2009 than in the previous years on account of the mild weather. In addition, the exchange rates for important currencies developed along favourable lines for Sto between October and December, as a result of which the drops in sales attributable to currency conversion effects were less extensive than had been forecast. These factors went a large way towards offsetting the decline in business resulting from the general economic downturn in the USA, the UK, northern and eastern Europe. The above-budget sales volume provided the basis for a virtually stable earnings situation from operating business. Another contributory factor was the fact that we introduced and rigorously applied additional cost-cutting measures at the beginning of 2009, in the face of the crisis engulfing the global economy and financial markets. In all, consolidated earnings before interest and tax (EBIT) fell by 1.1 % to EUR 82.3 million. Owing to an improved financial result, earnings before tax (EBT) rose by 3.3 % to EUR 78.9 million. Consolidated net income rose as a result of a lower tax rate by 7.3 % to EUR 55.6 million. The financial situation of the Sto Group developed positively in Cash flow from current operations rose by 29.4 % to EUR million; as at 31 December 2009, cash and cash equivalents were up EUR 36.9 million on the previous year, at EUR million, and thus exceeded our financial liabilities. The equity ratio improved from 53 % to 56.4 %. On the basis of the sound earnings, financial and assets situation, the Board of Directors and the Supervisory Board will propose that the dividend distribution remain unaltered at the Annual General Meeting on 15 June This means that our shareholders will again receive a dividend of EUR 0.31 per preferential share and EUR 0.25 per ordinary share. This will be supplemented by a bonus at the previous year's level of EUR 2.06 per share. Economic conditions in 2009 Global economic crisis 2009 saw the world economy in a deep recession. For the first time since 1946, global 16
19 Management Report for the Sto Group (IFRS) Sto AG economic output dropped in comparison to the previous year. Estimates by the International Monetary Fund (IMF) put the global decline at approximately 0.8 %. The industrial countries were affected particularly severely, their economies contracting by around 3.2 %. Output in the USA dropped by around 2.5 %, for example, while the corresponding figure in the euro zone stood at 3.9 %. According to calculations by the Federal Statistical Office, Germany's gross domestic product fell in real terms by as much as 5 % on account of the high export component. In contrast to the industrial nations, the developing and emerging countries above all China achieved collective growth to the tune of around 2.1 %. This also represents a considerable slowing-down in comparison to 2008, however, when growth stood at 6.1 %. Severe as it was, the cooling of the global economy in 2009 was not as extreme as had been feared at the beginning of the year. In particular, comprehensive economic stimulus packages, which were applied worldwide, and the massive injection of liquidity into the markets by the reserve banks led to a surprisingly swift stabilisation of the precarious situation as of the second quarter. Key economic and mood indicators have since improved continuously, with correspondingly positive effects in the real economy. The construction sector: predominantly weak With a few exceptions, the construction sector was also severely affected by the very difficult prevailing economic conditions in According to the EUROCONSTRUCT research association, the total volume of construction work shrank by more than 8 % in Europe. Building construction and new construction activity in particular suffered especially severely from the slump in demand, the volume in this segment plummeting by around 18 %. Sharp declines were to be observed above all in Ireland, Spain, Sweden, Finland and Denmark. New construction activity remained comparatively stable in Germany, Poland and Austria, with only moderate reductions. Switzerland even experienced a slight increase. Renovation business once again proved to be a mainstay for the construction sector, shrinking by only 4 % Europe-wide. The German construction industry received support in 2009 through high levels of investment as part of economic stimulus packages at central, state and local government level. According to the German Federal Building Association, this investment helped to boost sales by a significant 8.4 % in the area of public-sector construction between January and November. Meanwhile, commercial building experienced a slump, the pace of which did begin to slow over the course of the year, however. At the end of November, revenues in this segment were 8.8 % down on the previous year's figure. The business situation in the field of residential construction stabilised towards the end of the year. This was manifested by the number of building permits issued, for example, which showed a 19 % rise in November. This revival came too late to have any positive effect on sales, however, which were 5.4 % below the corresponding figures for 2008 in the period from January to November. According to information from the Federal Statistical Office, sales for Germany's main construction sector as a whole fell by 4.1 % in 2009 to EUR 83.3 billion. Orders received were down by 6.6 %, with the 13 % drop in orders in the building construction segment the main contributory factor here. The number of jobs in the main construction industry at the end of December remained at the previous year's figure of 705,000. The crisis in the global economy and financial markets clearly left its mark in the US construction industry. According to the Federal Office of Foreign Trade Information (bfai), the residential construction sector was 17
20 Sto AG Management Report for the Sto Group (IFRS) affected particularly severely once again in The first half of the year saw a particularly sharp drop in demand, before the situation stabilised in the second half of the year. The loss of business over the year as a whole is likely to range between 25 % and 30 % once again. The areas of commercial and infrastructure construction also came under pressure, suffering an overall decline of around 3 %. This resulted in a drop of over 10 % for the US construction industry as a whole. In contrast, the bfai estimates that the Chinese construction sector achieved double-figure growth despite the economic crisis in The construction industry was one of the major benefactors of the measures implemented by the government to stabilise the economy. The demand for construction work was stimulated above all by the widespread availability of statesubsidised loans and extensive infrastructure projects undertaken by the government. Sto Group Sales revenues in EUR millions Earnings, finance and asset situation of the Sto Group Sales and earnings situation Sto performed well in the face of very difficult underlying conditions in the 2009 financial year. Consolidated revenues dropped only moderately in 2009, by 2.3 % to EUR million. A major contributory factor to this comparatively good showing was the good sales of facade systems in Western Europe, which were stimulated by anti-recession packages and CO 2 reduction programmes in various countries. In addition, the customary decline in demand in the fourth quarter was markedly less pronounced in key regions than in previous years, on account of the mild weather. The net result of currency effects was a reduction in the consolidated business volume of EUR 6.3 million in Drops in sales attributable to currency conversion effects applied above all to the Polish zloty and the Swedish krona. These were offset by positive effects for the US dollar and Swiss franc, the value of which rose substantially last year in comparison to the euro. There were no effects resulting from changes to the group of consolidated companies in the past year. At regional level, German business proved very sound, with consolidated domestic sales rising by 4.5 % to EUR million. The good demand for facade systems was the main driving factor here. Our growth in this area more than compensated for declining sales resulting from the general economic situation in the areas of facade coatings, interior and other products. 18
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