KHD Humboldt Wedag International : AG CSR Report 2023

KHD Humboldt Wedag

International AG, Cologne

Separate Non-Financial Group Report

in accordance with Section 315b, Paragraph 3 of the

German Commercial Code (HGB)

for the 2023 Financial Year

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SEPARATE NON-FINANCIAL GROUP REPORT

Table of Contents

For the sake of improved readability, in this report KHD may occasionally make reference to people using grammatically masculine terminology. These references to persons in general apply to all genders equally: masculine, feminine, or other.

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Although the use of an established reporting framework in accordance with Section 315c in connection with Section 289d of the German Commercial Code (HGB) is recommended, German law does not specify a mandatory form. In the context of this recommendation, KHD has assessed the national and international reporting frameworks. Because the existing reporting frameworks are still heterogeneous in nature and so many are available, choosing a specific reporting framework did not seem useful. Due to the implementation of the Corporate Sustainability Reporting Directive (CSRD), starting in the 2024 financial year, KHD will disclose a sustainability report according to the European Sustainability Reporting Standards (ESRS).

This non-financial report for 2023 was prepared in the initial months of the 2024 financial year taking into consideration the legal specifications and the mandatory formalized reporting with regard to non-financial matters. In accordance with the legal requirements for non-financial reporting, the report includes an introductory description of the business model in addition to significant and / or necessary information for understanding business development, business performance, the position of the KHD Group, and the effects that KHD activities have on the specific non-financial matters. The matters discussed in this report include:

• Environmental matters,
• Employee matters,
• Social matters,
• Respect for human rights,
• Anti-corruptionand anti-bribery matters,
• Sustainability matters in the supply chain.

The process for determining the significant non-financial matters was implemented in the year 2018 in the context of an internal project that included consultation with internal experts from a variety of competent departments, such as Human Resources, Sales, Procurement, Controlling, Quality, and Research and Development, among others. The entire process was managed by a project team under the responsibility of the Chief Financial Officer of KHD AG. In the context of preparing this report, a review and update were conducted in the current financial year. There were no significant changes with regard to the non-financial matters in comparison with the previous year.

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Organization and Business Model

With its subsidiaries in Europe, the Americas, and Asia, KHD AG, based in Cologne, Germany, ranks as one of the world's top equipment suppliers and service companies for the cement industry. The scope of services encompasses process know-how and design, engineering, project management, and the supply of technology and equipment as well as supervising the erection and commissioning of cement plants and related equipment. It also includes customer services such as supplying spare parts, optimizing, maintaining, and repairing cement plants (e.g. with our mobile welding system for maintaining roller presses), and training plant personnel. The KHD Group focuses mainly on knowledge-intensive areas. The manufacturing of plant equipment is predominantly outsourced to quality-certified, external manufacturers who work in accordance with KHD's specifications. KHD successfully concluded the expansion of its own production capacities in India in the 2018 financial year. Since then and increasingly, selected products are manufactured with the Group's own production capacities.

In its capacity as the ultimate holding company of the Group, KHD AG holds a 100% investment in KHD Humboldt Wedag GmbH ("KHD GmbH"), Cologne, Germany, which functions as a holding company with no operating business activities. As of December 31, 2023, the Group comprised 11 companies (previous year: 12). The operating KHD Group companies focus on the business segment of industrial plant engineering as well as related services.

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Group Structure

KHD's customer base is made up of cement producers from around the world. Maintaining close contact with this target group is one of the keys to the success of the Group's business activities. Through our targeted sales, we ensure that our customers are served in accordance with their individual needs. We ensure direct customer care through our KHD subsidiaries in the respective sales territories.

Business Model

The range of KHD Group products and services is divided into the segments of Project Business (Capex) and Plant Services.

Capex (Project Business)

The scope in the Capex business unit encompasses process technology, design, engineering, project management, and the supply of technology and equipment (grinding, pyro process, system automation). Supervision of the erection and commissioning of cement plants and related equipment (Field Services) that is directly connected with the project business is also

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allocated to this segment. The KHD Group also organizes training for cement plant personnel. For this purpose, KHD draws on its own e-learning program, SIMULEX®, with which all processes in a cement plant can be simulated and controlled by the course participants. In this way, the Capex segment comprises essential deliveries and services directly connected with a plant engineering project.

The core range of technologies developed and equipment supplied by KHD includes systems for grinding and pyro processing, which are essential elements of every cement plant. Our grinding technology is used for grinding raw material, clinker, and clinker substitute and comprises crushing, grinding, and separation equipment as well as fans. The amount of grinding processes along with the arrangement and specific coordination of the individual plant components are crucial aspects for thermal and electrical energy consumption. The KHD Group's pyro processing equipment covers all of the key components of the kiln line, such as preheaters, calciner systems, burners, process fans, rotary kilns, and clinker coolers. With the PYROROTOR®, an advanced development of traditional calciner technology, KHD also provides technological solutions that allow very coarse and poorly prepared alternative fuels to be used to manufacture cement. With the market introduction of the PYROREDOX® gasification reactor in 2018, KHD reached another milestone in reducing emissions for cement plants. With this innovation, which does not require extensive catalytic technology or the use of ammonia, KHD offers an option for meeting the increasing requirements in terms of a significant reduction of nitrogen oxide emissions, even in the future. With the PYROREDOX® gasification reactor, KHD customers can realize reductions in both investment and operating costs. Moreover, the KHD Group has developed a number of system automation products, which are used together with process control systems to optimize plant performance.

Our products are characterized by their relatively low energy consumption, low service and maintenance costs, and reduced vibrations and noise emissions as well as minimal wear.

Plant Services

The range of services offered by KHD in the Plant Services segment includes the supply of spare and wear parts as well as various plant support services. These include maintenance services such as refurbishing roller presses, technical inspections, and audits as well as consulting and assistance services. In this respect, consulting on energy efficiency as well as reducing emissions and decreasing operating costs (e.g. fuel substitution by alternative fuels) when modernizing plants are increasingly important. The portfolio of digital service products is being expanded systematically. KHD's ProMax® integrates existing cement plant data and systems into a cloud-based suite of digital optimization solutions. Based on state-of-the-art technologies for digital twins and machine learning, KHD's ProMax® enables the optimized

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operation of cement plants. Ultimately, such optimization results in lower costs, lower energy consumption, and reduced emissions.

Objectives and Strategy

The KHD Group is a full service provider for cement plants and can offer the essential, material key components of a cement plant with its own products. Since its establishment more than 160 years ago, KHD has set itself apart with machines and plants developed in Germany and with leading technology. In product development, KHD focuses strongly on energy efficiency and environmentally friendly systems with minimal pollutant emissions and a long service life and are very easy to maintain. In its thermal line portfolio (Pyro Systems), KHD offers customers not only innovative products and solutions such as clay calcination with the Flash Calciner as well as PYROROTOR® and PYROREDOX®, but also proven products such as heat exchangers, rotary kilns, burners and clinker coolers. In terms of grinding technology, complete grinding plants from KHD are based on roller press technology which is especially efficient and our static and dynamic separator. KHD also offers a portfolio of products in the field of automation.

With our lean, quick organization we have flexibility in dealing with individual customer requirements and can create efficient solutions.

The KHD Group is consistently working on the six areas of activity for strategy implementation which were already presented in May 2023 during the Annual General Meeting:

1. Profiting from the "Green Transition";
2. Go China/India and improving our presence in selected markets;
3. EPC (engineering, procurement and construction) with strategic partnerships;
4. Expanding the service portfolio and digitalization;
5. Improving competitiveness on the cost side and excellence in execution;
6. Modernizing / upgrade of cement plants.

The six areas of activity are closely interrelated and incorporate sustainability aspects which are becoming increasingly important in the context of restructuring of the cement industry; moreover, if successfully implemented, they ensure the future performance of the KHD Group.

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SUSTAINABILITY MATTERS

The KHD Group has introduced a Code of Conduct as a central document that is mandatory for all employees. The Code of Conduct outlines explicit regulations or requirements to be observed with regard to non-financial matters. A Code of Ethics has been introduced for the top management level at KHG AG and KHD companies as well. It governs obligations that are above and beyond those in the Code of Conduct. For example, top management is required to promote ethical conduct actively and to report known violations of the Code of Conduct and the Code of Ethics proactively to the Supervisory Board of KHD AG.

KHD has identified the following sustainability issues as significant. Information is provided about the conceptual strategy and the key goals with respect to these issues. Explanations regarding how KHD ensures that the respective targets are actually met are also provided. Due diligence processes are described to the extent that they are important to the identification, prevention, and mitigation of negative effects.

In addition to the results (i.e. achievement of targets, implementation of measures) of the approaches pursued, explanations are provided regarding the significant risks in connection with the reported non-financial matters associated with our own business activities, business relationships, and our products and services. In the information about the significant risks, the KHD Group takes a net approach, i.e. in the assessment of the significant risks, the values specified are those that remain after considering the risk mitigation or risk limitation measures.

If non-financial performance indicators exist for the respective sustainability issue, these are explained. Significant non-financial performance indicators are those communicated to the Management Board internally for the purposes of Group management (known as the "management approach").

Environmental Matters

One of the principles in the Code of Conduct emphasizes that KHD feels a responsibility towards the environment. Particularly in the area of enhanced product development, environmental matters play a central role at KHD because the Group's business model is based on providing the most energy efficient and environmentally sensitive technologies for producing clinker and cement.

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Energy-efficient plants for reducing operating costs, using alternative fuels, and - to a continuously increasing degree - limiting CO2 emissions are highly important for customers of KHD. With the roller press, KHD not only has the most energy-efficient grinding technology, but also the most efficient solution for grinding slag. As our customers use slag and other clinker substitutes, KHD indirectly contributes to a considerable reduction in CO2 emissions by supplying the technology required to process these clinker substitutes, thus preventing the CO2 emissions that would otherwise occur during the pyro process related to the use of limestone. Another advantage of the KHD grinding technology with the roller press is that it uses significantly less process water in comparison with other technologies. Increasingly, our customers are requesting solutions that use alternative raw and residual materials as substitutes for limestone, which is carbon dioxide-intensive. Since the PYROCLON® calciner was introduced, KHD has been offering a solution for the calcination of alternative substances, such as clay. In addition to the energy-related benefits, the admixture of calcined clay drastically reduces the CO2 footprint of cements, which provides a significant contribution to climate protection.

For this reason, product development within KHD focuses on these critical environmental matters. The emphasis here is on the development of new technologies and the ongoing evolution and optimization of the existing product portfolio. Solutions for using alternative fuels and clinker substitutes as well as digitalization and carbon capture technologies are of key importance here. The focus on energy and emissions efficiency as well as resource preservation in the advanced development of our products is an important way for KHD to differentiate itself from competitors, particularly compared with companies from countries with low cost structures. In this respect, integrating these aspects successfully is highly significant to the commercial success of KHD as well.

The targeted advanced development of KHD products is carried out systematically and regularly with reference to specific customer projects. The key controlling instrument for these activities is the annual budget for research and development. In addition to the amount of the budget for product development, specific development targets are defined. The total expenses for research and development in the 2023 financial year amounted to € 4.1 million (previous year: € 2.9 million).

The use of natural resources is not a key subject in KHD companies because the manufacturing of KHD products is predominantly outsourced to certified suppliers. However, due to the long lifetime and the comparatively low need for repair and maintenance, KHD does indirectly contribute to using natural resources mindfully.

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