Performance Materials business development Audited

Performance Materials performed strongly in 2012, generating record sales of € 1,674 million (2011: € 1,465 million), an outstanding increase of 14.3%. The division benefited significantly from the stronger U.S. dollar as a dominant portion of its sales are booked in this currency. As a result, changes in foreign exchange rates added 7.0%. Organically, the division grew by 7.4% as robust growth trends in the flat panel display industry stimulated strong demand for liquid crystal materials, which contribute more than 70% to divisional sales. Increasing sales of TV sets and especially growing screen sizes led to high demand for liquid crystals materials with VA (vertical alignment), PS-VA (polymer stabilized vertical alignment) and IPS (in-plane switching) technologies. Sales volumes of IPS liquid crystals additionally benefited from growing sales of mobile devices with touch-screen LCD displays such as tablet PCs and smartphones. Additionally, as a result of incrementally improving the properties and characteristics of our marketed liquid crystals portfolio, we increased our market share to more than 60% in 2012 from around 55% in 2011.

The Pigments & Cosmetics business unit also increased its sales in 2012, albeit in comparison with a moderate previous year. Apart from significant positive foreign exchange rated effects, Pigments & Cosmetics registered organic sales growth with functional materials for plastic and printing applications and especially with the Xirallic® family of effect pigments, which are primarily used in automotive coatings. In 2011, volumes of Xirallic® pigments declined significantly as a result of supply bottlenecks due to the temporary shut-down of the business unit’s site in Onahama (Japan) caused by one of the strongest earthquakes Japan had ever seen. To raise it future supply reliability, the business unit commissioned a second production site for Xirallic® pigments in Germany in 2012, which helped to regain market share lost in this segment in 2011. From an overall market perspective, however, the automotive industry became increasingly cautious during the second half of the year with respect to its near-term volume projections.

Divestments had a negligible effect on the performance of the division in 2012. The sale of the battery electrolyte business to BASF, announced in February 2012, lowered sales only by 0.1%.

In 2012, the division’s gross profit grew 9.6% to € 959 million (2011: € 875 million), at a lower rate than sales growth, which reduced gross margin to 57.3% (2011: 59.8%). Several factors were responsible for this development: Higher volumes in addition to underutilization of production capacity as a result of reducing inventory levels led to an increase in production costs of 21.0% to € 716 million (2011: € 592 million). Furthermore, price concessions as a result of higher volumes additionally weighed on the gross margin.

Total selling, general and administration costs (including also license and commission expenses, other operating expenses/income) increased more than fourfold by € 179 million to € 219 million (2011: € 40 million). This development is attributable to the very low levels in the prior year, which included other operating income of € 157 million from the sale of the CropBioscience business to Novozymes. Moreover, other operating expenses of € 26 million related to the efficiency program were booked for the first time in 2012. The division has set itself the goal of optimizing the existing production network in addition to streamlining its organizational structure. Overall, other operating expenses of € 39 million in 2012 compared with other operating income of € 127 million in the previous year. The 7.9% increase in marketing and selling expenses and 6.4% rise in administrative costs, however, remained significantly lower than sales growth.

The same applies to R&D investments, which rose 3.5% to € 137 million (2011: € 133 million). This ongoing high level of 8.2% of sales (2011: 9.1%) reflects the sustainable innovation strategy of the division, especially in Liquid Crystals. Merck intends to maintain its leading market position in liquid crystal materials by both continuously improving existing products and developing new ones.

The aforementioned one-time items also had a significant impact on the operating result of the division. EBIT fell by 13.4% to € 599 million (2011: € 691 million) and EBITDA by 9.7% to € 723 million (2011: € 801 million). Adjusted for one-time items, EBITDA pre rose by 7.0% to € 731 million (2011: € 683 million), representing 43.6% of sales (2011: 46.6%).