ALTANA

Business Development

General Business Setting

Overall Economic Situation
In 2016, the growth path of the global economy was similar to that of the previous year. The International Monetary Fund (IMF) estimates that the world economy grew by 3.1 % last year (previous year: 3.2 %). Again in 2016, the emerging countries grew more dynamically than the established economic nations, whose growth slowed down slightly compared to 2015. The key economic indicators in the sales regions important for ALTANA’s business developed nonuniformly in the year under review.

At 1.7 %, growth in the euro zone was only slightly lower than in 2015 (2.0 %). The most important European economies showed stable growth. The German Federal Office of Statistics estimates that Germany’s economic performance improved at a higher rate than in the previous year, increasing by 1.9 % (previous year: 1.7 %).

According to current IMF forecasts, the economic dynamics in the countries of the Americas were very heterogeneous in 2016. Slower growth is forecast for the U.S. economy, decreasing from 2.6 % in 2015 to 1.6 % in 2016. The performance of the most important Latin American countries was considerably weaker. The economic crisis in Brazil, in particular, continued unabated in 2016. In the year under review, Brazil’s economic output fell by 3.5 % (previous year: - 3.8 %). Of the important economies, only Mexico posted notable growth, 2.2 %, which, however, was lower than in the previous year (2.6 %).

Growth in Asia slowed slightly in 2016 but was still at a high level. China and India showed particularly high growth, 6.7 % and 6.6 %, respectively, but the economic output in both countries was down on the previous year (6.9 % and 7.6 %). At 4.8 %, the growth in the ASEAN-5 economic region should be on a par with the positive trend of the previous year. The IMF expects the performance of the Japanese economy to be similar to 2015, with an increase of 0.9 % in its gross domestic product (previous year: 1.2 %).

Industry-Specific Framework Conditions
According to estimates by the American Chemistry Council (ACC), global chemical manufacture increased by 2.2 % in 2016, achieving slightly lower growth than in the previous year (2.7 %).

In 2016, there was no change in the production volume (chemicals excluding pharmaceuticals) of Germany, Europe’s largest chemical manufacturer, according to estimates by the German Chemical Industry Association (VCI). Due to lower prices, sales in the industry even decreased by 3.0 %. The ACC estimates that the chemical industries in other European countries developed positively, including France (+ 1.7 %) and Italy (+ 1.6 %). In Western Europe as a whole, chemical manufacture grew by 1.6 %.

The ACC forecasts that chemical manufacture in the U.S. was roughly on a par with 2015. In Latin America, chemical production fell due to recessions in some countries (- 3.5 %).

The chemical sector in the Asia-Pacific region was again the engine of global growth in the year under review. The ACC estimates that chemical production in the region grew by 3.8 %. All of the important economic nations in Asia showed a dynamic development. Chemical manufacture in China grew by 4.9 %, while Japan increased its chemical production by 3.7 %. India and South Korea also recorded growth (+ 2.1 % and + 2.9 %, respectively).

The price of crude oil steadily climbed in a corridor between 30 and 55 U.S. dollars in the course of the year, though at times it exhibited strong volatility. The average price in 2016 was lower than in the previous year, in whose second half the price fell substantially.

Important Events for Business Development
ALTANA’s earnings and financial situation as well as its assets in 2016 were influenced by non-operating effects.

In April 2016, the sale of ACTEGA Colorchemie GmbH and its three subsidiaries to Siegwerk Druckfarben AG & Co. KGaA was completed. In July, ALTANA acquired the Dutch company Addcomp Holland B.V., as well as its subsidiary in the U.S., which are being integrated in the Additives and Instruments division. Both changes in the Group’s reporting entities had an effect on the key control-specific performance indicators.

In 2016, the development of the exchange rates between the euro, our Group currency, and other currencies important for ALTANA had only a limited impact on sales and earnings development. The average exchange rate was 1.11 U.S. dollars for one euro, the same as in the previous year. Effects from changed exchange-rate relations resulted from an increase in the average exchange rate between the euro and the Chinese renminbi from 6.97 renminbi for one euro to 7.35 renminbi for one euro, and from a decrease in the average exchange rate between the euro and the Japanese yen to 120 yen for one euro (previous year: 134 yen for one euro).

While the changed average exchange rates for the year had a limited effect on the items on the income statement in 2016, differences in the exchange rates on December 31, 2016, had noticeable effects on the balance-sheet items compared to the previous year.

Business Performance

Group Sales Performance 
Group sales amounted to € 2,075.3 million in 2016, a 1 % or € 16.0 million increase over the previous year (€ 2,059.3 million). Non-operating effects had a negative influence on the sales growth. Exchange-rate changes, particularly the euro-Chinese renminbi exchange rate, accounted for a slight decrease in sales. In addition, Group sales fell due to the sale of the ACTEGA Colorchemie group, which was offset in part by the integration of the Addcomp companies in the BYK division. Adjusted for these changes in the reporting entities and exchange-rate effects, Group sales were 2 % higher than in the previous year.

As a result, we achieved operating sales growth at the lower end of the range of 2 to 5 % that we had anticipated for 2016 at the beginning of the year.

The main driver of the operating growth was an increase in sales volumes. The effects of price changes and product-mix shifts did not have a significant impact on the sales level compared to the previous year. But these influences developed unevenly within the Group.

The regional volume and sales structure shifted only slightly vis-à-vis 2015. Accounting for 38% of total Group sales (previous year: 39 %), Europe continued to be ALTANA’s most important sales market. Both nominal and operating sales in Europe were up on the previous year. The nominal sales generated in our home market Germany decreased on account of the sale of the ACTEGA Colorchemie group. Adjusted for this influence, however, slight growth was achieved in 2016. Sales outside Germany developed much more dynamically, particularly in Eastern European countries.

Sales in the Americas showed a weaker development than in the previous year. Operating sales fell by 4 %. Operating sales in the U.S. – still ALTANA’s largest sales market, accounting for 19 % of total sales – were down 5 %. A main reason for this decrease was the ongoing reduction of oil and gas exploration activities. In the course of the year, the development of new wells declined again due to the lower crude oil prices compared to the previous year. Furthermore, U.S. customers’ demand for our products and services was weaker, particularly in the first half of 2016. In the second half of the year, however, the demand situation improved steadily in the region. Sales in Brazil and other important Latin American markets did not reach the previous year’s levels. Overall, the Americas accounted for 28 % of global Group sales in 2016 (previous year: 29 %).

In 2016, Asia was responsible for 31 % of Group sales (previous year: 30 %). Recording operating growth of 8 %, Asia was the biggest growth driver of all the regions in the past fiscal year. With operating growth amounting to 11 %, the development of sales in China was particularly strong. And with a 16 % share of total sales, China is the Group’s second-largest sales market. Other Asian countries also made positive contributions to the sales growth, most notably India and Japan with growth rates of 9 % and 15 % respectively.

Sales Performance of BYK Additives & Instruments
Sales Performance of BYK Additives & Instruments In 2016, the BYK division increased its sales by 4 %, or € 39.1 million, to € 909.1 million (previous year: € 870.0 million). However, the sales growth due to the integration of the Addcomp companies was offset by slightly negative exchange-rate effects. Adjusted for these effects, the operating sales growth was also 4 %.

In the course of the year, BYK benefitted from sales shifts to higher-priced products. But the sales volume hardly changed in a year-to-year comparison. A decrease in demand for rheology additives, which are used, among other things, in oil and gas exploration activities, was compensated for by a positive development in other fields of business. The division’s strongest sales segment, additives for the coatings and paint industry, successfully expanded its business activities. In addition, the demand for the division’s measuring and testing instruments was above average.

In terms of regions, the division’s growth was driven by Asia, and especially by growing demand among customers in BYK’s second-largest sales market, China. Substantial sales growth was also generated in other important Asian countries, most notably in Japan and India. Sales in Europe did not grow at the same pace as the Asian growth region. But BYK was able to record growing demand in all of the important European markets. Only in Great Britain and a few other small sales markets did sales fail to reach the previous year’s level. Sales decreased in the Americas, dropping most significantly in our largest single market, the U.S. The ongoing decline in oil and gas exploration activities had a particularly negative effect on business performance. Only in the second half of the year did the negative trend abate in this market segment due to rising crude oil prices. Sales in Brazil also decreased in year-to-year terms.

Sales Performance of ECKART Effect Pigments
Sales in the ECKART division grew by 3 %, or € 12.2 million, to € 361.9 million in 2016 (previous year:
€ 349.7 million). Adjusted for slightly positive exchange-rate effects, the sales increase was also 3 %. The sales volume of effect pigments developed negatively last year. But the resulting sales drop was more than offset by a positive shift of sales toward higher-priced products.

The largest proportion of the products was sold to customers in the coatings, paint, and plastics industry, with sales in this segment exceeding the previous year’s level. In the last fiscal year, ECKART again significantly expanded its activities with customers in the cosmetics sector. In the graphic arts and functional applications segments, however, sales lagged behind the respective levels in 2015.

The regional demand for the division’s products was not uniform in 2016. As with BYK, Asia was by far the biggest growth driver. Europe recorded slight sales growth. A sales decline in this region’s largest market by far, Germany, was offset by growth in other countries. In the countries of North and South America, ECKART did not reach the previous year’s sales level.

Sales Performance of ELANTAS Electrical Insulation
In 2016, sales in the ELANTAS division fell by 2 %, or € 11.1 million, to € 452.1 million (previous year:
€ 463.2 million). The decrease resulted solely from negative exchange-rate effects, above all due to the change in the exchange rate between the euro and the Chinese renminbi. Adjusted for currency influences, sales were on a par with the previous year. Demand for the division’s insulating materials in 2016 showed a particularly favorable development. The resulting increase in the sales volume was offset by lower price levels, however.

The decrease in nominal sales is reflected in all of the important fields of business. Only the electrical product segment achieved a sales increase compared to the previous year.

In regional terms, the division’s core region Asia underwent a positive operating sales development. In 2016, Asia accounted for more than half of the division’s total sales. The sales achieved in China, ELANTAS’ most important market, showed a positive development. In other important economies in Asia, however, there was a decrease in demand. For example, sales generated in Japan and South Korea were down on the previous year. In Europe, too, ELANTAS had a very uneven business development. Sales fell in many Western European markets, while the sales volumes in some Eastern European countries rose sharply. Overall, sales in the core region Europe remained at the previous year’s level. In all of the important sales markets in the Americas, sales in 2016 were lower than in 2015. The decline in the U.S., ELANTAS’ second-most-important market after China, was one of the strongest. 

Sales Performance of ACTEGA Coatings & Sealants
With sales of € 352.2 million, the ACTEGA division did not reach the previous year’s level (€ 376.4 million). The decrease in nominal sales of 6 %, or € 24.3 million, is due exclusively to the sale of the ACTEGA Colorchemie group completed in April 2016. Adjusted for this effect and slight currency impacts, sales in the period under review were on a par with 2015. An increased sales volume was set against negative effects from a changed product mix and lower price levels.

In 2016, the regional sales structure of the ACTEGA division did not change significantly. In the last fiscal year, operating sales in the division’s largest core regions, Europe and the Americas, were slightly higher than in 2015. In Europe, positive sales impetus came from France and Italy. In the Americas region, sales rose in the U.S. and in Brazil, the division’s second-biggest market in the region. In other Latin American countries, however, ACTEGA’s sales decreased. In Asia, the division did not reach the sales level of the previous year. In the region’s largest sales market, China, as well as in other important countries, demand for the division’s products fell. In India, however, ACTEGA was able to increase its sales.

Earnings Situation

The operating sales growth was accompanied by a very positive earnings development. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose by 16 %, or € 62.1 million, to € 453.0 million (previous year: € 390.9 million). Adjusted for acquisition and exchange-rate effects, operating earnings increased by 15 %. ALTANA achieved an EBITDA margin of 21.8 % in the 2016 fiscal year (previous year: 19.0 %).

Both the development of the absolute EBITDA and the EBITDA margin surpassed our expectations. At the beginning of 2016, we had forecast earnings to outperform sales growth, but the profitability achieved exceeds our strategic target range of 18 % to 20 %.

The most important cost factor for ALTANA, raw materials and packaging costs, developed very well relative to sales. The materials usage ratio, the ratio of raw materials and packaging costs to sales, decreased in the course of 2016 to 39.7 % (previous year: 42.0 %). This trend is driven by all of our divisions. Apart from the generally lower price level on many of the raw materials markets important for ALTANA, the company is benefitting above all from its ongoing specialization in products and markets with higher added value and thus from positive product-mix changes.

Other cost factors important for ALTANA’s earnings largely developed in proportion to sales. Personnel expenses were at the previous year’s level; the latter, however, was burdened by restructuring expenses at sites in Germany. When the previous year’s figure is adjusted for this special burden, personnel expenses rose by 2 %. The ratio of total personnel expenses to sales decreased slightly to 21.8 % (previous year:
22.0 %).

In 2016, the structure of functional costs did not change significantly vis-à-vis 2015. Production costs were at the previous year’s level. Although production-related personnel expenses increased disproportionately, as did depreciation and amortization due to increased investment activity, expenses for consulting and other external services decreased.

In 2016, selling and distribution expenses decreased slightly compared to the previous year. The costs that depend directly on sales developed stably against the background of the slight sales increase, because an increase in sales commissions was counterbalanced by a decrease in freight charges.

Research and development expenses rose in proportion to sales. In this functional cost area, personnel expenses increased, as did depreciation and amortization in connection with the launch of new or expanded laboratory capacities.

Administrative expenses also developed in proportion to sales. Higher expenses for consulting services could be largely offset by a decrease in administrative-related personnel expenses.

The balance of other operating income and expenses improved considerably. This development is due to the fact that there were no extraordinary restructuring expenses and impairment losses on intangible assets and property, plant and equipment, as incurred in the previous year.

Earnings before interest and taxes (EBIT) reached € 328.7 million, thus surpassing the previous year’s level (€ 251.3 million). 

The financial result was € - 8.6 million (previous year € -10.7 million). The main reason for the improvement was interest income achieved in the context of tax refunds. Compared to the previous year, this effect could overcompensate for negative exchange-rate effects and other burdens. The balance of interest income from financial investments and interest expenses from loans and pension obligations reached the previous year’s level. On the other hand, the income from associated companies of € -12.9 million in the previous year worsened to € - 20.3 million in 2016. This decline is due to the fact that the Israeli company Landa Corp. posted a higher loss for the year. The company’s 2016 fiscal year was burdened by higher expenses for the preparation of a broad market introduction of new products.

Earnings before taxes (EBT) rose to € 299.8 million (previous year: € 227.8 million), and net income (EAT) to € 210.1 million (previous year: € 158.0 million).

Multi-period overview of the earnings situation

Financial Position

Capital Expenditure

In the 2016 fiscal year, ALTANA invested a total of € 122.1 million, € 36.5 million or 43 % more than in the previous year (€ 85.6 million). The investment ratio, or the ratio of investments to sales, was 5.9% and thus at the upper end of the target range of 5 % to 6 % we had forecast for 2016.

Of the total capital expenditure, € 106.4 million were invested in property, plant and equipment (previous year: € 74.5 million) and € 15.7 million in intangible assets (previous year: € 11.0 million). The investments in intangible assets resulted from the expansion of the ERP systems in the BYK, ECKART, and ACTEGA divisions, as well as from the capitalization of software licenses and intangible assets within the framework of the acquisition of business activities.

In the last fiscal year, the regional distribution of investments shifted toward Asia, and especially China. Asia’s share of Group investments increased to 25 % (previous year: 6 %), primarily due to the acquisition of a manufacturing site by the ELANTAS division. But as in the previous year, the largest share continued to be invested in Group sites in Europe (57 % compared to 67 % in 2015). The Americas region accounted for 18 % of our worldwide investments (previous year: 27 %).

In 2016, the BYK division invested a total of € 52.0 million (previous year: € 43.2 million), mainly to expand production and laboratory capacities as well as the ERP systems. An important individual project encompassed the purchase of a piece of property in Shanghai in order to bundle the region’s sales and research activities at one site in the future. Another large investment involved a facility for carrying out automated product analyses for additives at the Wesel site.

The investment volume in the ECKART division was € 17.2 million (previous year: € 19.3 million) and thus below the previous year’s figure. Due to ongoing worldwide efforts to make the ERP systems uniform, a not insignificant portion of the total amount was invested in software.

The ELANTAS division invested significantly more in property, plant and equipment and intangible assets than in the previous year (€ 30.9 million in 2016 compared to € 10.7 million in 2015). More than half of the total capital expenditure was allocated to the division’s sites in China, by far ELANTAS’ biggest sales market. The acquisition of a production site in Tongling was the most important individual project.

The ACTEGA division also invested more than in the previous year (€ 18.4 million in 2016 compared to € 12.0 million in the previous year). Important individual projects were the expansion of research and development capacities at its Grevenbroich site and the purchase of a new extruder for the manufacture of sealants. In addition, a new ERP system was introduced at the division’s Lehrte site.

Balance Sheet Structure

In the course of the 2016 fiscal year, the ALTANA Group’s total assets climbed from € 2,964.5 million to
€ 3,053.9 million. The increase of € 89.4 million, or 3 %, is mainly the result of stepped-up investment activity.

Intangible assets fell slightly to € 922.8 million (previous year: € 934.5 million). The scheduled depreciation and amortization on intangible assets from acquisitions was partly offset by the additions resulting from the acquisition of the Addcomp companies and by the investments in software. Owing to the increased investment activity in the last fiscal year, property, plant and equipment rose to € 781.1 million (previous year: € 751.3 million).

On December 31, 2016, non-current assets totaled € 1,831.0 million and were thus at the previous year’s level (€ 1,814.4 million). Their share in total assets was 60 % on the balance-sheet date (previous year:
61 %).

The change in current assets was influenced particularly by the change in the amount of cash and cash equivalents and short-term financial assets, as well as a change in net working capital. In the course of the year, cash and cash equivalents decreased to € 375.6 million (previous year: € 422.1 million). However, € 92.9 million need to be added that ALTANA held on the balance-sheet date as a time deposit investment with a term of more than three months against the background of the interest-rate development. 

Both inventories and trade accounts receivable increased slightly in the course of general business activity. The ratio of the total net working capital, in relation to the business development of the preceding three months and taking into account trade accounts payable, fell to 102 days at the end of 2016 (previous year: 105 days). The increase in the ratio of liabilities had a positive effect, which overcompensated for the slight increase in the ratio of inventories. The relative amount of trade accounts receivable remained stable compared to the previous year. The improvement of the net working capital ratios was in line with the development forecast at the beginning of 2016. Total current assets climbed by 6 % to € 1,222.8 million (previous year: € 1,150.1 million).

On the liabilities side, changes arose primarily due to the repayment of promissory note loans (German Schuldscheine) and the earnings-related increase in equity. Liabilities from promissory note loans were reduced on account of the scheduled repayment of one tranche (€ 42.5 million) and the termination of variable tranches (€ 83.5 million). As a result, non-current liabilities decreased to € 564.2 million (previous year: € 633.4 million). The reduction of debt was partly offset by an increase in employee benefit obligations. The share of total non-current liabilities fell from 21 % to 19 %.

Total current liabilities increased slightly from € 395.4 million to € 407.5 million on December 31, 2016. The increase in trade accounts payable and current provisions was almost completely offset by the decrease in current debt. The Group’s shareholders’ equity was up by € 146.6 million, or 8 %, to € 2,082.2 million (previous year: € 1,935.6 million). The increase is due to the net income in the 2016 fiscal year. The equity ratio climbed to 68 % on December 31, 2016 (previous year: 65 %).

The net financial assets, comprising the balance of cash and cash equivalents, short-term financial assets, current marketable securities, debt, and employee benefit obligations, were € 25.7 million at the end of 2016 (previous year: net financial debt of € 114.2 million).

Principles and Goals of Our Financing Strategy
We generally aim to finance our operating business activities from the cash flow from operating activities. The same applies to the need for capital expenditure, which caters to the continual expansion of business activities.

As a result, our financing strategy is oriented to keeping the cash and cash equivalents generated within the Group centralized. In addition, a financing framework is sought that enables ALTANA to flexibly and quickly carry out acquisitions and even large investment projects beyond the accustomed scope.

To successfully implement these goals, we manage nearly all of the Group’s internal financing centrally via ALTANA AG. To this end, cash pools for all of the important currency areas have been set up.

At the end of 2016, ALTANA’s liabilities totaled € 224 million due to the issuance of two promissory note loans in 2012 and 2013 (€ 350 million in total). The outstanding promissory note loans are divided into tranches with fixed interest rates and different maturities. The loans will be repaid by 2020. Furthermore, there is a general syndicated credit facility of € 250 million. The term of this credit facility will last until at least 2021.

This financing structure offers ALTANA the flexibility it needs to appropriately take advantage of short-term or investment-intensive growth opportunities. The distribution of the maturities of the financing instruments we use enables us to optimally control repayment of liabilities with inflows from operating cash flow.

We continue to use off-balance-sheet financing instruments to a very limited extent. These include purchasing commitments, operating leasing commitments, and guarantees for pension plans. Details on the existing financing instruments are provided in the online Consolidated Financial Statements.

Liquidity Analysis

In the course of 2016, the level of cash and cash equivalents decreased by € 46.5 million to € 375.6 million (previous year: € 422.1 million). In addition, on December 31, 2016, there were short-term financial assets amounting to € 92.9 million involving money-market investments with a remaining term of at least three months and less than one year.

Cash inflow from operating activities amounted to € 376.7 million, an increase of € 30.6 million, or 9 %, over the previous year (€ 346.1 million). As a result, the operating cash flow exceeded our expectations. At the beginning of 2016, we expected the cash inflow to be roughly the same as in the previous year. This growth was driven by the consolidated net income and the positive development of income tax items, as well as of provisions and other assets and liabilities.

Compared to 2015, the cash outflow from investing activities increased by € 93.6 million to € 234.3 million (previous year: € 140.7 million). This was driven by increased investments in intangible assets, property, plant and equipment, and money-market investments. The balance of payment for the acquisition of the BYK Addcomp companies in 2016 and the deposit from the sale of the ACTEGA Colorchemie group did not have a significant influence on the cash outflow from investing activities.

The cash outflow from financing activities amounted to € 185.4 million (previous year: € 63.1 million) in 2016. Debt was reduced in the course of the year due to scheduled repayments of promissory note loan tranches (€ 65.0 million) and the termination of variable tranches totaling € 61.0 million. The dividend payment in the 2016 fiscal year was on a par with that of the previous year.

Value Management

ALTANA determines the change in the company’s value via the key figure ALTANA Value Added (AVA). In the 2016 fiscal year, we made a significant contribution to our company’s value again.

The Group’s average capital employed fell to € 2,344.2 (previous year: € 2,354.4 million). The decrease largely resulted from the sale of the ACTEGA Colorchemie group, which was partially offset by the acquisition of the BYK Addcomp companies. At € 270.8 million (previous year: € 237.5 million), operating earnings rose due to the significantly improved earnings situation in 2016.

At 11.6 %, the return on capital employed (ROCE) was at a very good level and considerably higher than the previous year’s figure (10.1 %). With an unchanged cost of capital rate of 8.0 %, the relative AVA reached 3.6 % (previous year: 2.1 %).

Analogous to the decrease in operating capital, the cost of capital decreased slightly to € 187.5 million in 2016 (previous year: € 188.4 million). As a result, the absolute AVA amounted to € 83.3 million (previous year: € 49.2 million).

Due to the positive earnings development, we were able to improve the value key figures to a much greater extent than we had forecast for 2016.

Overall Assessment of the Business Performance and the Business Situation

In the course of the year, the overall economic framework conditions largely remained stable.

Despite the challenging market environment, ALTANA was able to increase its operating sales, though the regional growth dynamic was very uneven. Our profitability rose, primarily due to the increased gross margins.

We strengthened our balance-sheet structures even further and increased our financial headroom in 2016.