Performance Materials

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­Performance ­Materials

Key figure

Change
€ million 2017 2016 € million in %
Net sales 2,446 2,511 – 65 – 2.6%
Operating result (EBIT)1 689 823 – 134 – 16.3%
Margin (% of net sales)1 28.2% 32.8%    
EBITDA1 947 1,077 – 130 – 12.1%
Margin (% of net sales)1 38.7% 42.9%    
EBITDA pre1 980 1,106 – 127 – 11.4%
Margin (% of net sales)1 40.1% 44.1%    
Business free cash flow1 906 1,011 – 105 – 10.4%
1
Not defined by International Financial Reporting Standards (IFRS).

Development of net sales and results of ­operations

In 2017, net sales of the Performance Materials business sector decreased by – 2.6% to € 2,446 million (2016: € 2,511 million). This was mainly due to organic declines in sales (– 1.7%) as the Display Materials business did not reach the previous year’s level. The stronger euro compared with 2016 also impacted the development of net sales (– 0.9%).

The Display Materials business unit, consisting of the Liquid Crystals business and complementary materials, represented more than 50% of the net sales of Performance Materials. This business unit saw an organic decrease in sales, but continued to defend its market leadership position. The decline in sales stemmed from the performance of established liquid crystal technologies, caused by a normalization of the unusually high market shares as well as the price declines customary in this industry. An exception here was the energy-saving UB-FFS technology, which achieved high double-digit growth.

The Integrated Circuit Materials (IC-Materials) business unit recorded very strong organic sales growth, to which all major businesses contributed. Particularly high growth rates were achieved in the businesses with dielectric materials and deposition materials for chip production.

The Pigments & Functional Materials business unit generated a moderate increase in sales. The main driver was demand for materials for decorative applications, such as Xirallic® pigments, which are used particularly in automotive coatings.

In the Advanced Technologies business unit, higher demand for OLED materials led to significant sales growth.

The development of net sales in the individual quarters as well as the respective organic growth rates in 2017 are presented in the following overview:

PERFORMANCE ­MATERIALS

Net sales and organic growth1 by quarter2

€ million/organic growth in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.

PERFORMANCE ­MATERIALS

Net sales by region – 2017

€ million/% of net sales of the business sector

Accounting for 80% (2016: 80%), the Asia-Pacific region again generated the vast majority of the business sector’s net sales. This is due to the concentration of customers for display and integrated circuit materials in Asia-Pacific. In this region, sales declined to € 1,945 million (2016: € 2,013 million). Organically, sales decreased by – 2.4% owing to the performance of the Display Materials business unit. The good development of the IC Materials and Pigments businesses could not offset this.

In Europe, Performance Materials generated sales of € 231 million (2016: € 220 million). The Pigments & Functional Materials business unit was the main driver of the organic sales increase of 5.6%.

In North America, net sales declined slightly to € 223 million (2016: € 226 million) owing to foreign exchange effects. Organically, sales reached the previous year’s level.

Since they account for a low proportion of sales, the two regions Latin America and Middle East and Africa played a subordinate role. They recorded an organic decline in sales since the high level of sales generated with insect repellents in 2016 normalized.

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­Performance ­Materials

Net sales components by region – 2017

€ million/change in % Net sales Organic growth1 Exchange rate effects Acquisitions/ divestments Total change
Europe 231 5.6% –0.2% 5.3%
North America 223 0.4% –1.5% –1.1%
Asia-Pacific (APAC) 1,945 –2.4% –0.9% –3.4%
Latin America 37 –12.1% –1.0% –13.0%
Middle East and Africa (MEA) 10 –8.5% 0.6% –7.9%
Performance Materials 2,446 –1.7% –0.9% –2.6%
1
Not defined by International Financial Reporting Standards (IFRS).

The results of operations developed as follows:

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­Performance ­Materials

Results of operations

Change
€ million 2017 in % 2016 in % € million in %
Net sales 2,446 100.0% 2,511 100.0% – 65 – 2.6%
Cost of sales – 1,145 – 46.8% – 1,145 – 45.6%
(of which: amortization of intangible assets)1 (– 118) (– 118)   (–) (–)
Gross profit 1,301 53.2% 1,366 54.4% – 65 – 4.7%
           
Marketing and selling expenses – 242 – 9.9% – 233 – 9.3% – 9 4.1%
(of which: amortization of intangible assets)1 (– 14) (– 13)   (– 1) (5.8%)
Administration expenses – 72 – 2.9% – 61 – 2.4% – 12 19.0%
Research and development costs – 225 – 9.2% – 213 – 8.5% – 12 5.7%
(of which: amortization of intangible assets)1 (– 3) (– 2)   (– 1) (19.9%)
Other operating expenses and income – 73 – 3.0% – 37 – 1.5% – 36 97.5%
Operating result (EBIT)2 689 28.2% 823 32.8% – 134 – 16.3%
           
Depreciation/amortization/impairment losses/ reversals of impairment losses 258 10.5% 254 10.1% 4 1.5%
(of which: adjustments) (26) (16)   (9) (56.8%)
EBITDA2 947 38.7% 1,077 42.9% – 130 – 12.1%
           
Restructuring costs 5 1   5 100.0%
Integration costs/IT costs 20 26   – 5 – 21.2%
Gains (–)/losses (+) on the divestment of businesses 1   1
Acquisition-related adjustments 3   – 3 – 100.0%
Other adjustments 7   7
EBITDA pre2 980 40.1% 1,106 44.1% – 127 – 11.4%
1
Excluding amortization of internally generated or separately acquired software.
2
Not defined by International Financial Reporting Standards (IFRS).

In 2017, gross profit was € 65 million below the previous year’s level, resulting in a gross margin of 53.2% (2016: 54.4%). The operating result (EBIT) decreased by € 134 million to € 689 million in 2017 (2016: € 823 million). Apart from the sales-related decline in gross profit, the main reasons were higher marketing and selling expenses as well as additional research costs in order to press ahead further in growth markets, for example the development of liquid crystal window modules and OLED materials.

EBITDA pre amounted to € 980 million, which was € 127 million lower than in the previous year (2016: € 1,106 million). The EBITDA pre margin declined to 40.1% (2016: 44.1%).

The development of EBITDA pre in the individual quarters in comparison with 2016 is presented in the following overview:

PERFORMANCE ­MATERIALS

EBITDA pre1 and change by quarter2

€ million/change in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.

Development of business free cash flow

At € 906 million, the business free cash flow of the Performance Materials business sector fell short of the high year-earlier figure (2016: € 1,011 million). This resulted from the lower EBITDA pre, which could not be offset by the release of capital from the decrease in receivables.

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­Performance ­Materials

Business free cash flow

Change
€ million 2017 2016 € million in %
EBITDA pre1 980 1,106 – 127 – 11.4%
Investments in property, plant and equipment, software as well as advance payments from intangible assets – 125 – 109 – 16 14.5%
Changes in inventories – 14 35 – 49 > 100.0%
Changes in trade accounts receivable and receivables from royalties and licenses 65 – 19 84 > 100.0%
Elimination first-time consolidation of Sigma-Aldrich – 3 3 – 100.0%
Business free cash flow1 906 1,011 – 105 – 10.4%
1
Not defined by International Financial Reporting Standards (IFRS).

The development of business free cash flow in the individual quarters in comparison with 2016 is presented in the following overview:

PERFORMANCE ­MATERIALS

EBITDA pre1 and change by quarter2

€ million/change in %

1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.