In the second quarter of 2012, the Performance Materials division’s sales jumped 14.1% to € 426 million (Q2 2011: € 373 million). Performance Materials saw the strongest benefit of all Merck’s divisons from the stronger US$ as a significant portion of its sales are booked in this currency. As a result, the divison’s sales rose 10.2% due to changes in foreign exchange rates in the second quarter of 2012. Adjusting for this, Perfomance Materials reported organic sales growth of 3.9% in the quarter.
Volumes in the Liquid Crystals business – which contributes approximately 75% of the division’s sales – continued to benefit from strong consumer demand for televisions as well as touch-screen displays (smart phones, tablet PC’s), which primarily use in-plane switching (IPS) based Liquid Crystal materials. In addition, higher volumes for polymer stabilized vertical alignment (PS-VA) type Liquid Crystals, primarily used in mid- and large-sized televisions, drove sales. This was due to both higher sales volumes of televisions as well as the continuing trend for larger display sizes. According to estimates and forecasts of the display industry, television shipments are expected to continue with good momentum in the second half of 2012. However, given typical cycle and lead times in LCD manufacturing second quarter sales of Performance Materials already include liquid crystal shipments that the division’s customers will process in this year’s second half. In addition, the division expects some normalization of its high market share in the second half of the year. As a result, the business unit Liquid Crystals expects continued strong volumes in this year’s third quarter and a softening of sales in the fourth quarter.
In Pigments and Cosmetics, demand from coatings customers – primarily serving the automotive industry – was softer across the industry and only partially offset by strong sales from active ingredients for cosmetic applications.
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Performance Materials | Key figures | ||||||
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€ million |
Q2 2012 |
Q2 2011 |
Change |
Jan.–June |
Jan.–June |
Change |
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Total revenues |
426.6 |
373.5 |
14.2% |
812.8 |
782.2 |
3.9% |
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Sales |
426.1 |
373.4 |
14.1% |
812.5 |
781.4 |
4.0% |
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Operating result (EBIT) |
177.4 |
106.8 |
66.1% |
306.7 |
434.8 |
–29.4% |
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Margin (% of sales) |
41.6% |
28.6% |
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37.8% |
55.6% |
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EBITDA |
204.4 |
141.1 |
44.8% |
364.1 |
496.1 |
–26.6% |
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Margin (% of sales) |
48.0% |
37.8% |
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44.8% |
63.5% |
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EBITDA pre one-time items |
189.7 |
179.4 |
5.7% |
350.0 |
377.3 |
–7.2% |
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Margin (% of sales) |
44.5% |
48.0% |
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43.1% |
48.3% |
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During the second quarter, the division’s cost of sales amounted to € 183 million (Q2 2011: € 174 million), up 5.0% and representing a gross margin of 57.1% compared to 53.3% last year. The increase is due to the fact that last year’s second-quarter cost of sales was burdened with € 39 million in one-time charges for inventory adjustments. Excluding these costs, gross profit in the second quarter 2011 was € 238 million, equivalent to 63.7% of sales, while gross profit in this year’s second quarter came in at € 243 million or 57.1% as a percentage of sales. Negative product mix and lower prices led to this margin decline of the adjusted gross margin in the quarter.
Marketing and selling expenses were up 5.5% totaling € 35 million (Q2 2011: € 34 million). While most of the division’s sales are invoiced in foreign currencies, the majority of marketing and selling costs are based in Europe, resulting in a stronger impact from changes in foreign exchange rates on sales than on these costs. Other operating income in the second quarter of 2012 amounted to € 11 million (Q2 2011: € –10 million) and included a gain of € 16 million from the divestment of the division’s battery electrolytes activities to BASF. In line with the division’s aspiration to maintain its leading positions in technology and product innovation, investments in R&D increased by 7.7% to € 32 million (Q2 2011: € 30 million). Finally, no material amortization of intangible assets were booked in this year’s second quarter while last year’s second quarter included € 9 million of charges stemming from an impairment of patents related to organic light emitting diodes (OLED).
The reduction of one-time charges resulted in better operating performance, with EBIT totaling € 177 million (Q2 2011: € 107 million), up 66.1%, while EBITDA increased by 44.8% to € 204 million (Q2 2011: € 141 million). However, on a comparable basis after correcting for one-time items, EBITDA pre one-time items improved by 5.7% to € 190 million, or 44.5% of sales (Q2 2011: € 179 million, or 48.0% of sales).
Performance Materials | Sales by region – Q2 2012
From a regional perspective, Emerging Markets represented 73% of sales of Performance Materials in the second quarter of 2012, reflecting the concentration of Liquid Crystals customers in Asia. Consequently, divisional sales in this region grew the strongest with an 8.9% organic increase. Notably, sales of Liquid Crystals to China – where TV production primarily serves domestic demand – increased significantly, reaching nearly the same levels of sales generated in Japan.
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Performance Materials | Growth components by region – Q2 2012 | |||||
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€ million/change in % |
Sales |
Organic |
Exchange rate effects |
Acquisitions/ |
Reported |
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Europe |
40.3 |
–9.9% |
0.3% |
– |
–9.6% |
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North America |
22.4 |
3.5% |
13.7% |
– |
17.2% |
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Emerging Markets |
311.3 |
8.9% |
11.1% |
– |
20.0% |
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Rest of World |
52.1 |
–9.7% |
13.1% |
– |
3.4% |
Half-Year 2012 Performance
Looking at the divisional performance for the first half of 2012, Performance Materials faced a tough year-over-year comparison due to exceptionally strong demand for its Liquid Crystals materials, particularly in the first quarter of 2011. Overall, sales grew 4.0% to € 813 million (H1 2011: € 781 million) impacted by an organic sales decline of 2.3% which was more than offset by a 6.4% positive benefit from changes in foreign exchange rates. While demand for Liquid Crystals accelerated throughout the period under review due to increasing output from display customers, volumes in Pigments and Cosmetics remained soft in the first half of 2012 due to weak demand for coatings, which could only partly be offset by growth from active ingredients for cosmetic applications.
The division’s first-half EBITDA pre one-time items saw a decline of 7.2% to € 350 million (H1 2011: € 377 million), reflecting softer pricing and an unfavorable product mix. As a result, the margin as a percentage of sales declined to 43.1% (H1 2011: 48.3%) after an exceptionally strong performance in the first half of last year.
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