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Performance Materials

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­Performance ­Materials

Key figures
Change
€ million 2016 2015 € million in %
Net sales 2,511 2,556 – 45 – 1.8%
Operating result (EBIT) 823 878 – 55 – 6.3%
Margin (% of net sales) 32.8% 34.4%
EBITDA 1,077 1,120 – 43 – 3.9%
Margin (% of net sales) 42.9% 43.8%
EBITDA pre exceptionals 1,106 1,132 – 26 – 2.3%
Margin (% of net sales) 44.1% 44.3%
Business free cash flow 1,011 931 80 8.6%

Development of net sales and results of operations

In 2016, net sales of the Performance Materials business sector decreased by – 1.8% to € 2,511 million (2015: € 2,556 million). This was mainly due to organic declines in sales (– 4.7%) as Display Materials did not reach the level of 2015. The acquisition-related growth from the SAFC Hitech business of Sigma-­Aldrich acquired in November 2015 (2.7%) only partially offset the organic decline in sales. Exchange rate effects of 0.2% had only a slight influence on sales in 2016.

The Display Materials business unit, consisting of the Liquid Crystals business and complementary materials, represented more than 50% of the overall net sales of Performance Materials. This business unit saw a significant organic decrease in sales, but continued to defend its market leadership position. The sales decline in 2016 is based on a strong preceding year with consistently high demand for display materials. Despite signs of a recovery, demand remained at a lower level in 2016, among other things as a result of destocking by display industry customers. An exception was the energy-saving UB-FFS technology, which generated double-digit growth along with record sales in the fourth quarter.

The Integrated Circuit Materials (ICM) business unit generated strong organic sales growth, to which all businesses contributed. Particularly high growth rates were generated in the businesses with dielectric materials and deposition materials for chip production. In addition, sales of materials for chemical-mechanical planarization (CMP) of silicon wafers developed well.

The Pigments & Functional Materials business unit generated solid organic growth in 2016. Xirallic® pigments, which are used particularly in automotive coatings, as well as cosmetic actives and technical functional materials contributed significantly to the sales increase.

Growth in the Advanced Technologies business unit was fueled by double-digit sales increases in OLED materials.

The development of sales in the individual quarters as well as the respective organic growth rates in 2016 are presented in the following overview:


Performance ­Materials

Net sales and organic growth by quarter1
€ million / organic growth in %

1 Quarterly breakdown unaudited.

Performance ­Materials

Net sales by region – 2016
€ million /% of net sales of the business sector

With an 80% share (2015: 82%), the Asia-Pacific region once again accounted for 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. In this region, sales declined to € 2,013 million (2015: € 2,107 million). Organically, sales decreased by – 6.6% owing to the performance of the Display Materials business unit. The increases in sales of IC and OLED materials and of Pigments & Functional Materials could not compensate for this.

In North America, the double-digit increase in sales to € 226 million was fueled by the SAFC Hitech business of Sigma-­Aldrich (2015: € 194 million). Organically, sales reached the previous year’s level. The slight growth in Pigments & Functional Materials was canceled out by declines in the other business units.

In Europe, Performance Materials generated sales of € 220 million (2015: € 206 million). The organic sales increase of 5.2% was generated by functional materials and Xirallic® pigments in the Pigments & Functional Materials business unit as well as by process materials in the IC Materials business unit.

Since they account for a low proportion of sales, the two regions Latin America and Middle East and Africa (MEA) played a subordinate role. Whereas Latin America continued to show double-digit organic growth at a low overall level, the sales improvement in the Middle East and Africa region was primarily acquisition-related.

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­Performance ­Materials

Net sales components by region – 2016
€ million / change in % Net sales Organic growth Exchange rate effects Acquisitions /
divestments
Total change
Europe 220 5.2% – 0.4% 2.0% 6.9%
North America 226 – 0.3% 0.9% 15.7% 16.3%
Asia-Pacific (APAC) 2,013 – 6.6% 0.6% 1.6% – 4.5%
Latin America 42 21.0% – 16.8% 4.3%
Middle East and Africa (MEA) 10 8.0% – 2.6% 23.5% 28.8%
­Performance ­Materials 2,511 – 4.7% 0.2% 2.7% – 1.8%

The results of operations developed as follows:

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­Performance ­Materials

Results of operations
Change
€ million 2016 in % 2015 in % € million in %
Net sales 2,511 100.0% 2,556 100.0% – 45 – 1.8%
Cost of sales – 1,145 – 45.6% – 1,151 – 45.1% 7 – 0.6%
(of which: amortization of intangible assets)1 (– 118) (– 115) (– 3) (2.4%)
Gross profit 1,366 54.4% 1,404 54.9% – 38 – 2.7%
           
Marketing and selling expenses – 233 – 9.3% – 208 – 8.1% – 25 12.0%
(of which: amortization of intangible assets)1 (– 13) (– 16) (3) (– 16.2%)
Administration expenses – 61 – 2.4% – 63 – 2.5% 3 – 4.1%
Research and development costs – 213 – 8.5% – 197 – 7.7% – 16 8.0%
(of which: amortization of intangible assets)1 (– 2) (– 1) (– 2) (> 100.0%)
Other operating expenses and income – 37 – 1.5% – 58 – 2.3% 21 – 36.3%
Operating result (EBIT) 823 32.8% 878 34.4% – 55 – 6.3%
             
Depreciation / amortization / impairment losses /
reversals of impairment losses
254 10.1% 242 9.5% 12 4.8%
(of which: exceptionals) (16) (–) (16) (> 100.0%)
EBITDA 1,077 42.9% 1,120 43.8% – 43 – 3.9%
             
Restructuring costs 1 2 – 1 – 70.7%
Integration costs / IT costs 26 15 11 73.0%
Gains / losses on the divestment of businesses – 6 6 > 100.0%
Acquisition-related exceptionals 3 1 2 > 100.0%
Other exceptionals
EBITDA pre exceptionals 1,106 44.1% 1,132 44.3% – 26 – 2.3%
1
Excluding amortization of internally generated or separately acquired software.

In 2016, gross profit was € 38 million below the previous year’s level, leading to a gross margin of 54.4% (2015: 54.9%). The operating result (EBIT) decreased by € 55 million to € 823 million in 2016 (2015: € 878 million). Apart from the sales-related decline in gross profit, the main reasons for the decrease were higher marketing and selling expenses as well as additional research costs attributable to the SAFC Hitech business from the Sigma-Aldrich acquisition. EBITDA pre exceptionals amounted to € 1,106 million, which was € 26 million lower than in the previous year (2015: € 1,132 million). Yet the EBITDA margin pre exceptionals of 44.1% almost reached the good year-earlier level (2015: 44.3%).

The development of EBITDA pre exceptionals in the individual quarters in comparison with 2015 is presented in the following overview:


Performance ­Materials

EBITDA pre exceptionals and change by quarter1
€ million / change in %

1 Quarterly breakdown unaudited.

Development of business free cash flow

In 2016, the business free cash flow of the Performance Materials business sector increased to € 1,011 million (2015: € 931 million). This improvement was mainly attributable to significant inventory reductions, which more than offset the decline in EBITDA pre exceptionals.

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­Performance ­Materials

Business free cash flow
Change
€ million 2016 2015 € million in %
EBITDA pre exceptionals 1,106 1,132 – 26 – 2.3%
Investments in property, plant and equipment, software
as well as advance payments for intangible assets
– 109 – 109
Changes in inventories 35 – 83 119 > 100.0%
Changes in trade accounts receivable as well as receivables from royalties and licenses – 19 – 34 15 – 44.7%
Adjustments first-time consolidation of Sigma-­Aldrich – 3 25 – 28 > 100.0%
Business free cash flow 1,011 931 80 8.6%

The development of business free cash flow in the individual quarters in comparison with 2015 is presented in the following overview:


Performance ­Materials

EBITDA pre exceptionals and change by quarter1
€ million / change in %

1 Quarterly breakdown unaudited.