Course of Business and Economic Position

Transcription

1 0 Course of Business and Economic Position Group Overview of 07 Group net sales increase slightly by.0% to 5.3 billion Healthcare and Life Science deliver organic sales growth EBITDA pre of 4.4 billion nearly meets high year-earlier level At 8.8%, Group profitability (EBITDA pre margin) remains at a high level (06: 9.9%). U.S. tax reform leads to significant deferred tax income and a corresponding increase in profit after tax as well as earnings per share Stable earnings per share pre of 6.6 (06: 6.). Business free cash flow of 3.3 billion on a par with year-earlier figure Net financial liabilities decline by.9% to 0. billion (December 3, 06:.5 billion) Key figures Change million million in % Net sales 5,37 5, % Operating result (EBIT),55, % Margin (% of net sales) 6.5% 6.5% EBITDA 4,8 4, % Margin (% of net sales) 7.9% 9.4% EBITDA pre 4,44 4, % Margin (% of net sales) 8.8% 9.9% Profit after tax,60, % Earnings per share ( ) % Earnings per share pre ( ) % Business free cash flow 3,38 3,38 DEVELOPMENT OF NET SALES AND RESULTS OF OPERATIONS In 07, net sales of the Group increased by 303 million or.0% to 5,37 million (06: 5,04 million). This increase was mainly attributable to organic sales growth of 578 million or 3.8%, driven by our Healthcare and Life Science business sectors. In 07, the stronger euro resulted in negative foreign exchange effects of.5%. In particular, this affected North America due to the exchange rate development of the U.S. dollar, as well as Asia-Pacific as a result of negative exchange rate effects from the Chinese renminbi and the Japanese yen. Acquisitions and divestments caused Group net sales to decline by 0.3%. The divestment of the subsidiaries in Pakistan in December 06 had a negative impact on net sales of our Healthcare business sector, whereas the first-time consolidation of BioControl Systems, Inc., (USA), led to higher sales in Life Science.

2 The development of net sales in the individual quarters as well as the respective organic growth rates in 07 are presented in the following overview: Net sales and organic growth by quarter million/organic growth in % Q Q Q3 Q4 07 3,86 3,89 3,77 3, ,665 3,805 3,74 3,830 % 3.%.3% 4.% 5.9% Quarterly breakdown unaudited. With organic sales growth of 4.7%, our Healthcare business sector achieved an increase in sales of 44 million to 6,999 million (06: 6,855 million). Consequently, Healthcare remained the strongest business sector in terms of sales with a one percentage point higher share of 46% (06: 45%) of Group sales. In 07, Life Science achieved organic sales growth of 5.3%. Including negative foreign exchange effects (.7%) and acquisition-related sales increases (+ 0.4%), sales of this business sector rose by 4 million to 5,88 million (06: 5,658 million). In 07, Life Science accounted for an unchanged 38% share of Group sales. Owing to slight organic sales declines (.7%) as well as slight negative exchange rate effects ( 0.9%), the net sales of Performance Materials amounted to,446 million (06:,5 million). Consequently, this business sector accounted for 6% (06: 7%) of Group net sales. Net sales by business sector 07 million/% of net sales 6% Performance Materials,446 38% Life Science 5,88 46% Healthcare 6,999 Net sales components by business sector 07 million/change in % Net sales Organic growth effects Exchange rate Acquisitions/ divestments Total change Healthcare 6, %.6%.0%.% Life Science 5,88 5.3%.7% 0.4% 4.0% Performance Materials,446.7% 0.9%.6% Group 5,37 3.8%.5% 0.3%.0%

3 Net sales by region 07 million/% of net sales 8% Latin America,3 3% Asia-Pacific (APAC) 4,9 4% Middle East and Africa (MEA) 608 3% Europe 4,756 5% North America 3,80 In Asia-Pacific, the Group s largest region in terms of sales, our company generated net sales of 4,9 million in 07 (06: 4,736 million), which represents an increase of 85 million or 3.9%. The very strong organic growth of 7.3%, which was due to the business performance of our Healthcare and Life Science business sectors, was partly canceled out by negative foreign exchange effects (.8%) and divestment effects (.5%). The contribution to Group sales by the Asia-Pacific region rose by one percentage point to 3% (06: 3%). In 07, sales in Europe amounted to 4,756 million (06: 4,735 million), thus remaining at the year-earlier level. The organic growth driven by Life Science and Performance Materials was almost completely offset by negative foreign exchange effects, which were primarily due to the British pound. As a result, Europe s share of Group sales remained unchanged at 3%. The decrease in net sales in North America by.3% to 3,80 million (06: 3,858 million) was mainly due to the exchange rate development of the U.S. dollar. The organic sales growth of Life Science (4.5%) and the decline in sales of Healthcare largely offset each other. Consequently, the share of Group sales attributable to North America declined to 5% (06: 6%). The very positive development of net sales in Latin America resulted in sales growth of 8.4% to,3 million (06:,36 million). This was mainly attributable to the good operating business of Healthcare, which generated double-digit organic growth rates in the region. In 07, the share of Group sales attributable to Latin America remained unchanged at 8%. In the Middle East and Africa region, the 8.8% increase in sales to 608 million (06: 559 million) was mainly due to organic growth in Healthcare, which is the most important business sector for the region. The share of Group sales attributable to the region remained unchanged at 4%. Net sales components by region 07 million/change in % Net sales Organic growth effects divestments Total change Exchange rate Acquisitions/ Europe 4,756.% 0.8% 0.% 0.4% North America 3,80 0.5%.3% 0.5%.3% Asia-Pacific (APAC) 4,9 7.3%.8%.5% 3.9% Latin America,3 9.% 0.9% 0.% 8.4% Middle East and Africa (MEA) %.0% 0.% 8.8% Group 5,37 3.8%.5% 0.3%.0%

4 3 The consolidated income statement of the Group is as follows: Consolidated Income Statement Change million 07 in % 06 in % million in % Net sales 5, % 5, % 303.0% Cost of sales 5, % 5,0 34.6% 9.3% (of which: amortization of intangible assets) ( 79) ( 8) () (.0%) Gross profit 0, % 9, % 84.9% Marketing and selling expenses 4, % 4,56 30.% % (of which: amortization of intangible assets) (,07) (,03) (5) (.5%) Administration expenses % % % Research and development costs,40 4.0%,976 3.% % (of which: amortization of intangible assets) ( 5) ( 4) ( ) (0.6%) Other operating expenses and income 90.9% 4 0.% 75 > 00.0% Operating result (EBIT),55 6.5%,48 6.5% 44.8% Financial result 300.0% 36.% 6 8.0% Profit before income tax,4 4.5%,54 4.3% 70 3.% Income tax 386.5% 5 3.5% 907 > 00.0% Profit after tax,60 7.0%, % % Non-controlling interests 0 0.% 4 0.0% 6 > 00.0% Net income, %,69 0.8% % Excluding amortization of internally generated or separately acquired software. In 07, gross profit of the Group increased by 84 million or.9% to 0,007 million (06: 9,83 million). This increase was due to our Life Science business sector, where gross profit rose by 35 million, whereas the other two business sectors did not meet the year-earlier level. The gross margin of the Group, i.e. gross profit as a percentage of net sales, amounted to 65.3% (06: 65.4%). The development of marketing and selling expenses was mainly influenced by our Healthcare business sector, which reported higher marketing and selling expenses particularly owing to imminent market launches and higher license expenses. The increase in Group research and development costs by 8.3% to,40 million, which was primarily attributable to our Healthcare business sector, led to a research spending ratio (research and development costs as a percentage of net sales) of 4.0% (06: 3.%). Accounting for 78% of Group R&D spending (06: 76%), Healthcare was the most research-intensive business sector of the Group.

5 4 Research and development costs by business sector 07 million/in % % Life Science 4 % Performance Materials 5 78% Healthcare,63 Not presented: Research and development costs of 4 million allocated to Corporate and Other. Other operating expenses and income (net) showed an income balance of 90 million in 07 (06: 4 million). The strong increase resulted primarily from transactions in our Healthcare business sector. In particular, the gain on the divestment of the Biosimilars business amounting to 39 million had an impact. This gain was eliminated in the calculation of EBITDA pre. Reversals of impairment losses, the receipt of compensation for future license payments and the receipt of milestone payments also contributed to this (see explanations in the section entitled Healthcare ). Furthermore, this item also includes expenses in connection with the company s 350th anniversary in 08. On the occasion of this anniversary, a promise of a one-time payment as well as a gift in the form of shares in Merck KGaA, Darmstadt, Germany, was made to employees. These expenses were also eliminated during the calculation of EBITDA pre. In 07, a provision in a mid double-digit million amount was set up for an ongoing European Commission antitrust review proceeding relating to the acquisition of Sigma-Aldrich (see Note (7) Other provisions in the Notes to the Consolidated Financial Statements). The corresponding negative impact on earnings, which was allocable to our Life Science business sector, was reported under other operating expenses and eliminated during the calculation of EBITDA pre. Detailed information about the development and composition of other operating expenses and income can be found in Note () Other operating income and Note () Other operating expenses of the Consolidated Financial Statements. Overall, the development of income and expenses in the Group income statement led to a.8% increase in the operating result (EBIT), which amounted to,55 million (06:,48 million). The improvement in the negative financial result by 6 million to 300 million (06: 36 million) resulted mainly from exchange rate gains in connection with the financing activities of the Group. At 7 million, the interest result contained in the financial result was on a par with the previous year (06: 70 million) (see Note (3) Financial result in the Notes to the Consolidated Financial Statements). The income balance of 386 million (06: expense balance of 5 million) under income taxes was due to one-time effects in connection with tax reform in the United States. The new U.S. tax regulations led in particular to a reduction in the deferred tax liabilities of the Group and thus to corresponding deferred tax income. Further information about income taxes in general and U.S. tax reform in particular can be found in Note (4) Income taxes in the Notes to the Consolidated Financial Statements. Thanks to the successful operating business and especially owing to the exceptional tax income in connection with the tax reform in the United States, the excellent level of net income rose by 97 million or 59.7% to a record level of,600 million (06:,69 million). Earnings per share increased accordingly to 5.98 (06: 3.75). EBITDA pre, the key financial indicator used to steer operating business, declined slightly by 76 million or.7% to 4,44 million (06: 4,490 million). The resulting EBITDA pre margin thus decreased by around one percentage point to 8.8% (06: 9.9%). The reconciliation of the operating result (EBIT) to EBITDA pre is presented in the chapter entitled Internal Management System.

6 5 The development of EBITDA pre in the individual quarters in comparison with 06 as well as the respective growth rates are presented in the following overview: EBITDA pre and change by quarter million/change in % Q Q Q3 Q ,40,093,076,005,084,58,74,075 % 4.5% 5.6% 8.3% 6.5% Quarterly breakdown unaudited. The slight decrease in Group EBITDA pre was attributable to our Healthcare and Performance Materials business sectors. By contrast, the good business performance of Life Science had a positive effect on this earnings indicator. Healthcare, which again was the business sector with the highest EBITDA pre, generated,949 million in 07 (06:,8 million), thus contributing 4% (06: 43%) of Group EBITDA pre (excluding the 30 million decline due to Corporate and Other). EBITDA pre of our Life Science business sector improved by 8.% to,786 million (06:,65 million). Consequently, the business sector s share of Group EBITDA pre rose by 4 percentage points to 38% (06: 34%). With an EBITDA pre of 980 million (06:,06 million), the share of this Group key performance indicator attributable to Performance Materials decreased to % (06: 3%). EBITDA pre by business sector 07 million/in % % Performance Materials % Life Science,786 4% Healthcare,949 Not presented: Decline in Group EBITDA pre by 30 million due to Corporate and Other.

7 6 Balance sheet structure Dec. 3, 07 Dec. 3, 06 Change million in % million in % million in % Non-current assets 8,66 79.% 30, %,43 7.9% of which: Goodwill 3,58 5,05,433 Other intangible assets 8,37 9,980,663 Property, plant and equipment 4,5 4,3 8 Other non-current assets,755, Current assets 7, % 7, % 5.8% of which: Inventories,63,609 3 Trade accounts receivable,93, Current financial assets Other current assets,, Cash and cash equivalents Total assets 35,6 00.0% 38, %, % Equity 4, % 4, % 6 0.% Non-current liabilities, % 5,9 39.5%,00 4.5% of which: Provisions for pensions and other post-employment benefits,57,33 56 Other non-current provisions Non-current financial liabilities 8,033 8, Other non-current liabilities,84 3,63,3 Current liabilities 8,635 4.% 9, % % of which: Current provisions 44 4 Current financial liabilities,790 3, Trade accounts payable,95, Other current liabilities 3,34, Total liabilities and equity 35,6 00.0% 38, %, % Previous year s figures have been adjusted, see Note (4) Acquisitions and divestments in the Notes to the Consolidated Financial Statements. The total assets of the Group declined in comparison with December 3, 06 by,637 million to 35,6 million (December 3, 06: 38,58 million). A significant reason for this was the development of the euro-u.s. dollar exchange rate. In particular, intangible assets, which for the most part are carried in U.S. dollars, declined sharply owing to the weaker U.S. dollar. The development of other non-current liabilities was mainly due to the decline in deferred tax liabilities included in this item. Owing to new U.S. tax reform legislation, deferred taxes were remeasured using modified tax rates. The resulting decrease in deferred tax liabilities led to corresponding tax income and consequently to an improvement in net income (see Note (4) Income taxes in the Notes to the Consolidated Financial Statements). The slight reduction in working capital to 3,387 million (06: 3,488 million) was due mainly to the increase in trade accounts payable.

8 7 Working capital Change million Dec. 3, 07 Dec. 3, 06 million in % Trade accounts receivable,93, % Receivables from royalties and licenses % Inventories,63, % Trade accounts payable,95, % Working capital, 3,387 3, % Previous year s figures have been adjusted, see Note (4) Acquisitions and divestments in the Notes to the Consolidated Financial Statements. The composition and the development of net financial debt were as follows: Net financial debt Change million Dec. 3, 07 Dec. 3, 06 million in % Bonds and commercial paper 8,3 9,650, % Bank loans,653, % Liabilities to related parties % Loans from third parties and other financial liabilities % Liabilities from derivatives (financial transactions) % Finance lease liabilities % Financial liabilities 0,83,597,774 4.% less Cash and cash equivalents % Current financial assets % Net financial debt 0,44,53,369.9 % Reconciliation of net financial debt million January,53,654 Currency translation difference 49 8 Dividend payments to shareholders and to E. Merck KG, Darmstadt, Germany Acquisitions 7 56 Payments from the disposal of assets held for sale and from other divestments Free cash flow,433,693 Other 9 44 December 3 0,44,53 According to the consolidated cash flow statement.

9 8 The equity of the Group rose slightly in 07 to 4,066 million (December 3, 06: 4,050 million). The very strong level of profit after tax amounting to,60 million (06:,633 million) was offset by currency translation differences from the translation of assets held in foreign currencies into euro, dividend payments, and the profit transfer to E. Merck KG, Darmstadt, Germany (see Consolidated Statement of Comprehensive Income and Consolidated Statement of Changes in Net Equity in the Consolidated Financial Statements). The lower level of total assets and the slight increase in equity led to an improvement in the equity ratio by nearly 3 percentage points to 39.5% (Dece mber 3, 06: 36.7%). The increase in cash inflows from operating activities served among other things to finance the strong investing activity of the Group. Consequently, free cash flow decreased to,433 million (06:,693 million). The composition as well as the development of the relevant items are presented in the following table: Free cash flow Change million million in % Cash flow from operating activities according to the cash flow statement,696, % Payments for investments in intangible assets > 00.0% Payments from the disposal of intangible assets 4 > 00.0% Payments for investments in property, plant and equipment % Payments from the disposal of property, plant and equipment 44 3 > 00.0% Free cash flow,433, % Business free cash flow of the Group was 3,38 million in 07, which met the previous year s figure. The slight decline in EBITDA pre as well as higher capital spending were primarily offset by the development of receivables. The composition of this financial indicator is presented in the combined management report under Internal Management System. The distribution of business free cash flow across the individual quarters and the percentage changes in comparison with 06 were as follows: Business free cash flow and change by quarter million/change in % Q Q Q3 Q , , % 0.4% 9.7% 6.% 8.9% Quarterly breakdown unaudited.

10 9 Business free cash flow by business sector 07 million/in % 4% Performance Materials % Life Science,40 Not presented: Decline in Group business free cash flow by 437 million due to Corporate and Other. 39% Healthcare,448 The contributions of the operating business sectors to business free cash flow of the Group developed in 07 as follows: Healthcare generated business free cash flow amounting to,448 million (06:,648 million). Consequently, with a 39% share (06: 43%) of Group business free cash flow (excluding the decline of 437 million due to Corporate and Other) Healthcare was once again the business sector with the highest cash flows as per the definition of this key performance indicator. In 07, our Life Science business sector achieved a further increase in the previous year s strong level by.5% to,40 million (06:,44 million), thus increasing its share of Group business free cash flow to 37% (06: 30%). Performance Materials contributed 906 million (06:,0 million) to this Group financial indicator, equivalent to 4% (06: 7%). The investments in property, plant, equipment and software as well as advance payments for intangible assets included in the calculation of business free cash flow increased in 07 by.9% to a total of,047 million (06: 859 million). The investments in property, plant and equipment included therein amounted to 936 million in 07 (06: 753 million), of which 438 million (06: 33 million) was attributable to strategic investment projects each with a project volume of more than million; the remainder was attributable to smaller investment projects. In 07, strategic investments of million were made to expand the Darmstadt site. Of this amount, 76 million was used to upgrade global headquarters; the projects include an Innovation Center and an employee cafeteria, among other things. In addition, a new sampling center for regulated products was constructed for 0 million. In our Healthcare business sector, investments included 33 million in a new laboratory building for pharmaceutical research and 8 million in a new packaging center. Outside Germany, high levels of strategic investment were also made. Particularly in China, both our Healthcare and Life Science business sectors invested 5 million and 6 million, respectively, in new production facilities. Furthermore, our Performance Materials business sector invested million in the Netherlands to construct a production facility for the manufacture of liquid crystal window modules. Our credit ratings from the independent rating agencies did not change in 07. Our company is currently rated by Standard & Poor s, Moody s and Scope. Standard & Poor s has issued a long-term credit rating of A with a stable outlook, Moody s a rating of Baa with a stable outlook, and Scope a rating of A, likewise with a stable outlook. An overview of the development of our rating in recent years is presented in the Report on Risks and Opportunities. The development of key balance sheet figures is as follows: Key balance sheet figures in % Dec. 3, 07 Dec. 3, 06 Dec. 3, 05 Dec. 3, 04 Dec. 3, 03 Equity ratio Asset ratio Asset coverage Finance structure Equity Total assets Non-current assets Total assets Equity Non-current assets Current liabilities Liabilities (total) 39.5% 36.7% 33.8% 45.4% 53.% 79.% 80.0% 80.7% 59.7% 64.5% 49.9% 45.9% 4.8% 76.0% 8.4% 40.% 37.5% 37.% 46.5% 40.0% Previous year s figures have been adjusted, see Note (4) Acquisitions and divestments in the Notes to the Consolidated Financial Statements.

11 0 OVERALL ASSESSMENT OF BUSINESS PERFORMANCE AND ECONOMIC SITUATION Fiscal 07 was a year of challenges and one that opened up numerous new opportunities for the future with the approvals of Bavencio and Mavenclad. Key strategic intentions were implemented or introduced. The financial targets that we had set ourselves for 07 were achieved. Moderate organic growth enabled Group net sales to increase to 5,37 million (06: 5,04 million). In 07, EBITDA pre amounted to 4,45 million (06: 4,490 million), which meant we almost reached the very good year-earlier figure. With an EBITDA pre margin of 8.8% (06: 9.9%), our profitability remains at a notable level even though our Healthcare and Performance Materials business sectors contended with challenges. We also made progress with the reduction of net financial debt: Despite our high capital spending, we lowered our debt by,369 million. Consequently, net financial debt amounted to 0,44 million on December 3, 07 (December 3, 06:,53 million). With the approvals of Bavencio and Mavenclad, our Healthcare business sector achieved major milestones. The steady further development of the promising pipeline remains a high priority. This was reflected by an above-average increase in research and development costs. In 07, the divestment of the Biosimilars business closed and the company announced it is reviewing strategic options for the Consumer Health business. The business performance of Life Science was very successful and we are excellently positioned for the future. Performance Materials was adversely affected by the market development in the Liquid Crystals business. The business sector is intensively working to consolidate our position at a continued high level. The good key balance sheet figures, which improved further in 07, illustrate the solid finance policy being pursued by the Group. For instance, the equity ratio rose to 39.5% (06: 36.7%) and has thus reached a very good level. We will continue to assign high priority to the rapid reduction of our financial liabilities. In 07, there were no changes to our credit ratings by the independent rating agencies Standard & Poor s (A with a stable outlook), Moody s (Baa with a stable outlook) and Scope (A with a stable outlook). Based on our solid net assets and financial position as well as successful business performance, the economic position of the Group can be assessed positively overall. It represents a good foundation for the promising further development of our businesses.