ALTANA

General Business Setting

Overall Economic Situation
In 2015, the global economy did not develop as dynamically as in the preceding years. The International Monetary Fund (IMF) estimates that the world economy grew by 3.1 % last year (previous year: 3.4 %). The weaker growth was primarily due to the economic slowdown in the emerging countries, which are an important driver of the global economic development. The established economic regions steadily improved their economic performance in 2015.

The key economic indicators in the sales regions important for ALTANA’s business developed non-uniformly in the year under review.

In Europe, the positive trends stabilized, and the IMF estimates the economic growth in the Euro zone to be 1.5 % (previous year: 0.9 %). The growth was primarily due to the improved situation in the southern countries, particularly Italy, France, and Spain. The German Federal Office of Statistics estimates that Germany’s economic performance improved at about the same rate as in the previous year, increasing by 1.7 % (previous year: 1.6 %). The Russian economy is forecast to have declined by 3.7 %, following a slight increase in the previous year.

According to current IMF forecasts, the economic dynamics in the countries of the Americas were very heterogeneous in 2015. Similar to the previous year, the U.S. economy developed favorably, achieving average growth of 2.5 % in 2015. Mexico’s economy also grew by 2.5 %. The economic performance of Canada, however, slackened considerably vis-a-vis the previous year (2.5 %), increasing by only 1.2 %. In Brazil, South America’s largest economy, the economic output actually fell by 3.8 % according to the IMF (previous year: + 0.1 %).

In Asia, China’s economic downswing continued in 2015. The IMF forecasts 6.9 % growth for the country, by far Asia’s largest economy, after 7.3 % in the previous year. This decline could not be offset by the rebounding Japanese economy (+ 0.6 % after stagnating the previous year). The economic growth in India and in the largest economies of southeast Asia (ASEAN-5) kept up with that of the previous year, at 7.3 % and 4.7 %, respectively.

Industry-Specific Framework Conditions
According to estimates by the American Chemistry Council (ACC), global chemical manufacture rose by 2.8 % in 2015, an increase that was slightly lower than the strong growth in the previous year (3.0 %). As a result, chemical manufacture tended to develop on a par with the global economic performance.

However, the regional shifts in chemical manufacture do not reflect the general economic development of the respective region in all of the countries. In 2015, Germany, Europe’s largest chemical manufacturer, showed a slight decrease in chemical production of 0.5 % (excluding pharmaceuticals), according to estimates by the German Chemical Industry Association. Due to lower prices, sales in the industry continued to decrease. On account of the positive economic development in the southern European countries, chemical manufacture increased in France, Italy, and Spain.

The American Chemistry Council estimates that chemical manufacture in the U.S. grew by 3.6 % in 2015.

Due to declining manufacture in China, the Asian chemical sector is expected to post significantly lower growth than in the previous year (3.3 % compared to 5.2 %). The American Chemistry Council estimates that chemical production in China grew by 6.5 % in 2015, versus 8.6% in the previous year. In Japan, production even fell slightly. Compared to the previous year, a 1.1 % decrease is expected.

The price of crude oil decreased substantially in the second half of 2015. In the first months of the year, the price of a barrel of Brent Crude remained relatively stable, hovering around 60 U.S. Dollars. Starting in July, the price fell steadily, closing the year at just under 40 U.S. Dollars.

Important Events for Business Development
ALTANA’s earnings and financial situation as well as its assets in 2015 were influenced by non-operating effects.

At the end of 2014, we acquired two companies in Brazil. Their integration into the ACTEGA division affected the comparison with the previous year.

The expansion of ALTANA’s non-controlling interest in Landa Corp., Rehovot, Israel, influenced the balance sheet figures on December 31, 2015, as well as the income statement for the reporting period.

In 2015, the development of the exchange rates between the Euro, our Group currency, and other currencies important for ALTANA had a significant impact on sales and earnings development. In the course of the year, the value of the Euro against the U.S. Dollar decreased significantly. The average exchange rate fell from 1.33 U.S. Dollars for one Euro in 2014 to 1.11 U.S. Dollars for one Euro last year. The relationship between the Euro and the Chinese Renminbi followed a similar path, with the average exchange rate decreasing from 8.19 Renminbis for one Euro to 6.97 Renminbis for one Euro. The development of these two currencies had very positive effects on the translation of the items in the income statement. The Euro also lost ground to the Japanese Yen and the Indian Rupie, but the resulting influences were not as strong.

The change of the Euro - U.S. Dollar exchange rate from the balance-sheet date at the end of 2014 to that at the end of 2015 also had a strong effect on the consolidated balance sheet. This was due to the translation of balance- sheet items of U.S. Group companies to the Group currency, the Euro, at different exchange rates. The price of one Euro fell from 1.21 U.S. Dollars at the end of 2014 to 1.09 U.S. Dollars at the end of 2015.

Business Performance

Key figures

Group Sales Performance
Group sales amounted to € 2,059.3 million in 2015, a 5 % or € 107.0 million increase over the previous year (€ 1,952.3 million). Non-operating positive effects had a significant influence on the growth. Exchange-rate changes, particularly the Euro - U.S. Dollar and Euro - Chinese Renminbi exchange rates, accounted for sales growth of 7 %. Furthermore, the integration of the Brazilian companies, acquired at the end of 2014, into the ACTEGA division boosted Group sales by € 24.1 million. Adjusted for these acquisition and exchange- rate effects, Group sales were 2 % lower than in the previous year.

As a result, we did not achieve the operating sales growth of 2 to 5 % that we had anticipated for 2015 at the beginning of the year. One main reason ALTANA fell short of the forecast was the slower growth in China. In nearly all of our divisions, operating sales in China lagged significantly behind those of the previous year. And sales in the area of oil and gas exploration did not meet expectations either. Due to the ongoing decline in crude-oil prices, exploration activities were curbed, particularly in the U.S.

In total, the Group’s sales volumes were below the previous year’s level. The effects of price changes and product- mix shifts had a slightly positive impact on Group sales. But these influences developed unevenly within the Group.

The regional volume and sales structure shifted slightly on account of currency impacts.

Accounting for 39 % of total Group sales (previous year: 41 %), Europe continued to be ALTANA’s most important sales market. Both nominal and operating sales were roughly at the previous year’s level. The sales generated in our home market Germany could not match the previous year’s figure. But this decline was offset by increases in other European countries. We achieved sales growth particularly in southern markets.

Sales continued to expand in the Americas, due in part to the stronger U.S. Dollar compared to the Euro, the Group currency, and to the acquisitions made in Brazil at the end of 2014. Nominal sales in the region increased by 15 %. Adjusted for acquisition and exchange-rate effects, however, sales fell by 4 % in a year-to-year comparison. The decrease in operating sales was driven mainly by the considerable decrease in oil and gas exploration activities. The development of new wells in the U.S. abated to a particularly large extent parallel to the decline in oil prices. However, the share of sales generated in the Americas rose due to nominal growth to 29 % (previous year: 27 %). Accounting for 20 % of ALTANA’s total sales, the U.S. remains our largest sales market.

In 2015, Asia was responsible for 30 % of Group sales, unchanged from the previous year. However, operating sales did not reach the 2014 level. The weaker economic growth in China, in particular, led to a significantly lower demand for the Group’s products and services in the region. With a 15 % share of total sales, China is the Group’s second-largest sales market. 

Sales by division

Sales by region

Sales Performance of BYK Additives & Instruments
In 2015, the BYK division increased its sales by 2 % or € 13.3 million to € 870.0 million (previous year: € 856.7 million). Adjusted for positive exchange-rate effects, sales were 4 % lower than in the previous year.

One reason for the decline in operating sales were lower sales volumes on the Chinese market. The weaker overall economy and the slower growth in our industry compared to the previous year led to a decreased demand for the division’s specialty products. Apart from triggering a decline in demand in end-user business, the deterioration of the economic environment also resulted in a reduced inventory along the value chain. In addition, the significant decrease in the price of crude oil in the course of the year led to a considerable reduction of oil and gas exploration activities. The demand for rheology additives, which are used, for example, in exploration, therefore steadily declined. These sales decreases could not be offset within the division.

In terms of regions, Asia and the Americas were affected the most by the decrease in operating sales. In Asia, the double-digit percentage operating sales decline in China could not be offset by the ongoing strong growth in India and the Middle East because the weaker momentum in China negatively impacted demand in the entire Southeast Asia region. While sales increased in the Americas due to exchange-rate changes, adjusted for these effects the region did not achieve the level of 2014. The decrease in oil and gas exploration activities, in particular, had a negative influence on the division. Especially in the U.S., BYK’s largest single market, the development of new wells declined considerably. The sales development in Europe was very stable. A slight decrease in sales in Germany was compensated for by growth in other countries in Europe.

Sales Performance of ECKART Effect Pigments
Sales in the ECKART division grew by 5 % to € 349.7 million in 2015 (previous year: € 332.2 million). Adjusted for positive exchange-rate effects, sales reached the previous year’s level. The sales volume of effect pigments developed positively in 2015. But the resulting sales increase was eroded by negative effects resulting from the shift of the product mix as well as slightly lower price levels.

The sales increase was due in particular to the higher demand for aluminum and zinc pigments, while the amount of copper products sold decreased. ECKART continued to expand its activities with customers in the cosmetics industry and benefitted, among other things, from taking over the sale of products from other divisions in the Group. Since ECKART has supplied this market for years, the division has a good position there, which we leverage Group-wide.

The regional demand for the division’s products was not uniform in the reporting period. Sales rose in Europe, with the decrease in Germany, by far our largest single market in the region, offset by growth in other countries. Operating sales in the countries of North and South America were on a par with the previous year. But the decrease in oil and gas exploration activities had a negative impact on demand for ECKART’s functional products. On account of the significant decrease in demand in China, ECKART’s operating sales in Asia did not reach the previous year’s level.

Sales Performance of ELANTAS Electrical Insulation
In 2015, the ELANTAS division boosted sales by 7 % to € 463.2 million (previous year: € 431.2 million). Positive exchange- rate effects, and particularly the stronger U.S. Dollar and Chinese Renminbi against the Euro, had a strong impact on this development. Adjusted for currency influences, sales were 3 % lower than in the previous year.

This development was due to the lower sales volumes, especially in the important Chinese market, as well as to the lower sales prices.

Asia accounted for half of the division’s sales in 2015. Due to a decrease in demand in this region, sales lagged behind the previous year’s figures. This decline was driven by the Chinese market. In the 2015 fiscal year, operating sales to customers in China decreased in a nearly doubledigit percentage range. This negative influence could not be offset by the strong business expansion in India. Nor could ELANTAS reach its 2014 sales level in Europe. Sales were lower than in the previous year in nearly all of the important sales markets on the continent. Business developed positively in the Americas, however. On account of an expansion of activities with products for the electrical and electronics industries, sales increased significantly in the U.S. This boost in sales led to sales growth in the entire Americas region.

Sales Performance of ACTEGA Coatings & Sealants
With sales of € 376.4 million (previous year: € 332.1 million), the ACTEGA division achieved nominal growth of 13 %, thus showing the most dynamic growth of all of our divisions. On the one hand, this increase was promoted by positive exchange-rate effects. On the other, ACTEGA’s sales rose due to the integration of the companies in Brazil acquired at the end of 2014. Adjusted for these influences, operating sales were slightly above the previous year’s level. A higher sales volume was counteracted by negative effects from a changed product mix and a lower price level.

In 2015, the regional sales structure clearly shifted to the Americas. Although operating sales in this region were only on a par with the previous year’s level, due to the positive exchange-rate effects on account of the strong U.S. Dollar and the acquisitions made in Brazil, the share of sales in the division’s total sales increased to 39 %. The U.S. remains ACTEGA’s most important sales market. In Europe, sales were roughly the same as in the previous year. Lower sales in Germany were counterbalanced by growth in other European countries. ACTEGA increased its sales in Asia in 2015. In comparison with the regional structure of Group sales, the region’s share in the division’s total sales – around 10 % – remained at a below-average level.

Earnings Situation

Like the key sales figures, the development of the most important earnings indicators was influenced significantly by exchange-rate effects. But this positive influence could not completely offset the negative effects on earnings that resulted from decreasing operational sales. Earnings before interest, taxes, depreciation and amortization (EBITDA) fell by 2 % to € 390.9 million (previous year: € 397.4 million). Adjusted for acquisition and exchange-rate effects, operating sales fell by 4 %. ALTANA achieved an EBITDA margin of 19.0 % in the 2015 fiscal year (previous year: 20.4 %).

Both the development of the absolute EBITDA and the EBITDA margin lagged behind our expectations. At the beginning of 2015, we had expected earnings growth to be at the level of sales growth and thus profitability to be around 20 %.

The negative deviation from the forecast is due on the one hand to the fact that the positive exchange-rate effects were reflected less in earnings than in sales. The sales revenue achieved, particularly from the exchange rate between the Euro and the U.S. Dollar, and the Euro and the Chinese Renminbi, comprise a higher share of our total sales than the share of earnings generated in these currencies. On the other hand, restructuring measures and general increases in personnel expenses gave rise to a disproportionately high increase in operating costs.

The most important cost factor for ALTANA, raw materials and packaging costs, developed well relative to sales. The materials usage ratio, the ratio of raw materials and packaging costs to sales, decreased in the course of 2015 to 42.0 %. This trend is driven by nearly all of our divisions and is due, among other things, to the backwards integration of certain production materials that has been continually pushed forward in recent years, as well as to increasing specialization on products and markets with higher added value. Another reason is that in the last fiscal year prices on all of the important raw-materials markets developed advantageously for ALTANA.

Other cost factors important for ALTANA, however, increased disproportionately to sales growth. Personnel expenses were higher due to the wage adjustments that were resolved, to the acquisitions made in 2014 in Brazil, and to the expansion of our workforce. The ratio of personnel expenses to sales climbed to 22.0 %, including restructuring expenditure at sites in Germany. In addition, due to impairment losses on intangible assets and property, plant and equipment, depreciation and amortization increased by € 11.5 million.

The structure of functional costs did not change significantly in 2015. Production costs generally increased, above all due to currency impacts and the integration of the companies acquired in Brazil. In addition to the general increase in personnel expenses, which is also reflected by the increase in production-related personnel expenses, depreciation and amortization climbed disproportionately as a result of the expansion of production capacities in the BYK division.

In the 2015 fiscal year, the increase in selling and distribution expenses was disproportionately lower compared to sales. At the same time, the costs that depend directly on sales developed stably because an increase in freight was offset by a decrease in sales commissions.

Research and development expenses, however, increased more strongly than sales. In this functional cost area, personnel expenses increased, as did expenditure for outsourced research and development work as well as travel expenses. In addition, depreciation and amortization increased in connection with the launch of new or expanded laboratory capacities.

The disproportionately high increase in administrative expenses was largely driven by exchange-rate effects and the integration of the new companies in Brazil. Another contributing factor was the increased expenditure for long-term incentive plans for employees. In 2015, the balance of other operating income and expenses was impacted considerably by extraordinary restructuring expenditure and impairment losses on intangible assets and property, plant and equipment.

Earnings before interest and taxes (EBIT) reached € 251.3 million (previous year: € 267.7 million), thus falling shy of the previous year’s level.

The financial result was € -10.7 million (previous year € -14.1 million). The main reasons for the improvement were decreased interest expenses for debt as well as lower burdens from pension obligations. On the other hand, the income from associated companies of € -1.8 million in the previous year worsened to € -12.9 million in 2015. This decline is due to the fact that ALTANA expanded its in- terest in the Israeli company Landa Corp. and the share of income of Landa was taken into account for a full year for the first time. As the first shareholding was acquired in mid-2014, only the proportionate income from the second half of the year was taken into account. Moreover, the company expanded its production and development activities prior to the broad market launch of new products and thus posted a higher annual loss.

Earnings before taxes (EBT) fell to € 227.8 million (previous year: € 251.8 million), and net income (EAT) to € 158.0 million (previous year: € 179.2 million).

Multi-period overview of the earnings situation

Sales

EBITDA

Financial Position

Capital Expenditure

Capital expenditure by division

In the 2015 fiscal year, ALTANA invested a total of € 85.6 million to expand intangible assets and property, plant and equipment (previous year: € 90.4 million). The investment ratio, or the ratio of investments to sales, was 4.2 %, below the range of 5 to 6 % we had forecast for 2015. Individual projects were suspended or postponed due to our weakening operating business performance in the course of the year.

Of the total capital expenditure, € 74.5 million were invested in property, plant and equipment (previous year: € 85.5 million) and € 11.0 million in intangible assets (previous year: € 4.9 million). The significant increase in investments in intangible assets is primarily due to the expansion of the ERP infrastructure in the BYK and ECKART divisions.

After the extensive expansion of U.S. manufacturing capacities in the BYK division was completed in 2014, the regional focus of our investments shifted back to Group sites in Germany. A little more than half of all our investments were made in German subsidiaries. Another considerable part of the capital was invested in the U.S.

In 2015, the BYK division invested a total of € 43.2 million (previous year: € 45.9 million), primarily to expand production capacities as well as the ERP infrastructure. This capital expenditure was mainly earmarked for BYK’s largest site, in Wesel, and its subsidiaries in the U.S.

The investment volume in the ECKART division was € 19.3 million (previous year: € 20.1 million), again below the previous year’s figure. The most important individual project was the expansion of capacities for manufacturing products for functional applications in the construction industry.

The ELANTAS division invested less in property, plant and equipment and intangible assets than in the previous year (€ 10.7 million in 2015 compared to € 15.9 million in 2014). Half of the capital expenditure was allocated to the division’s manufacturing and development sites in Italy.

The ACTEGA division invested more in intangible assets and property, plant and equipment (€ 12.0 million in 2015 versus € 8.2 million the year before). A focal point was the expansion of research and development capacities at its Grevenbroich site that began in 2015.

Capital expenditure ALTANA Group (in € million)

Balance Sheet Structure

Key figures

In the course of the 2015 fiscal year, the ALTANA Group’s total assets climbed from € 2,756.2 million to € 2,964.5 million. The increase of € 208.3 million, or 8 %, is mainly attributable to exchange-rate effects. The strengthening of the U.S. Dollar against the Euro, the Group currency, in particular, led to higher balance-sheet values resulting from the translation of the balance-sheet values of our U.S. Group companies.

Intangible assets rose by € 9.6 million to € 934.5 million (previous year: € 925.0 million). Amortization on intangible assets was offset by positive exchange-rate effects. Also, there were small additions in the area of software. Property, plant and equipment was also influenced by exchange-rate fluctuations. The increase to € 751.3 million (previous year: € 740.3 million) was driven by currency impacts, while additions were roughly on a par with depreciation and amortization.

On the balance-sheet date, non-current assets totaled € 1,814.4 million, 3 % higher than in 2014 (€ 1,753.7 million). Their share in total assets fell to 61 % in the course of the year.

The change in current assets was primarily influenced by the change in the amount of cash and cash equivalents. The latter rose from € 277.1 million to € 422.1 million on December 31, 2015, an increase of € 145.0 million. The developments of inventories and trade accounts receivable virtually balanced each other out. 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 105 days at the end of 2015 (previous year: 110 days). The increase in liabilities had a positive effect on the ratio, which overcompensated for the 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 2015. Total current assets climbed by 15 % to € 1,150.1 million (previous year: € 1,002.5 million).

On the liabilities side, ALTANA reduced non-current debt further to € 633.4 million (previous year: € 701.2 million). This decline is due on the one hand to the fact that in the 2016 fiscal year the first tranche from the existing promissory note loans (German Schuldscheine) is due for repayment and this portion is therefore recorded on the balance sheet under current debt. On the other hand, employee benefit obligations decreased. The share of total non-current liabilities fell from 25 to 21 %. Total current liabilities increased from € 309.5 million to € 395.4 million on December 31, 2015. The reclassification of the promissory note loan falling due in the short term accounted for € 65.0 million of it. Furthermore, the trade accounts payable rose.

The Group’s shareholders’ equity increased by € 190.2 million to € 1,935.6 million (previous year: € 1,745.5 million). In addition to the net income in the 2015 fiscal year, the influence of exchange-rate changes led to a significant increase in shareholders’ capital. The equity ratio climbed to 65 % on December 31, 2015 (previous year: 63 %).

The net financial debt, comprising the balance of cash and cash equivalents, current marketable securities, debt, and employee benefit obligations, was reduced by € 165.9 million in the course of 2015 to reach € 114.2 million at the end of the year (previous year: € 280.1 million).

Structure of consolidated balance sheet

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 2015, ALTANA’s liabilities totaled € 350 million due to the issuance of two promissory note loans in 2012 and 2013. The promissory note loans are divided into tranches with both variable and fixed interest rates and different maturities. The loans will be repaid with nearly stable annual contributions between 2016 and 2020. Furthermore, a general syndicated credit facility with a line of credit of € 250 million was adjusted and renewed in 2015. The new term of the credit facility is five years with the option of a two-year extension.

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 Notes to the Consolidated Financial Statements.

Liquidity Analysis

Key figures

In the course of 2015, the level of cash and cash equivalents increased by € 145.0 million (previous year: € 19.2 million) to € 422.1 million (previous year: € 277.1 million).

Cash inflow from operating activities rose by 16% to € 346.1 million (previous year: € 298.2 million). As a result, the operating cash flow exceeded our expectations. At the beginning of 2015, we expected the cash inflow to be roughly the same as in the previous year. This growth was driven by the reduction of net working capital, which offset the lower consolidated net income as well as the negative effects of income tax items. The development of provisions also had a positive impact.

Compared to 2014, the cash outflow from investing activities decreased to € 140.7 million in 2015 (previous year: € 162.9 million). Apart from the slightly lower investments in intangible assets and property, plant and equipment, there were no payments for acquisitions in 2015, while the previous year includes the acquisition of the Brazilian companies.

The cash outflow from financing activities amounted to € 63.1 million (previous year: € 123.2 million) in 2015. Debt was reduced insignificantly in the course of the year. In the previous year, ALTANA recorded a much higher cash outflow from the reduction in liabilities due to the repayment of acquisition financing from 2013. The dividend payment in the 2015 fiscal year was slightly higher than in the previous year.

Value Management

Key figures value management

ALTANA determines the change in the company’s value via the key figure ALTANA Value Added (AVA). In the 2015 fiscal year, we made a substantial contribution to the development of our company’s value again.

The Group’s average capital employed rose to € 2,354.4 million (previous year: € 2,299.6 million). The main influences on the capital were the acquisitions in Brazil and exchange-rate effects. At € 237.5 million (previous year: € 235.9 million), operating earnings rose only to a small extent.

The return on capital employed (ROCE) was slightly lower than in 2014, amounting to 10.1 % (previous year: 10.3 %). With an unchanged cost of capital rate of 8 %, the relative AVA reached 2.1 % (previous year: 2.3 %).

Analogous to the increase in operating capital, the cost of capital increased to € 188.4 million in 2015 (previous year: € 184.0 million). As a result, the absolute AVA amounted to € 49.2 million (previous year: € 51.9 million).

Thus, we were not able to achieve the slight improvement of value key figures we had forecast for 2015. But we achieved the high previous year’s level.

Overall Assessment of the Business Performance and the Business Situation

In the course of the year, the overall and industry-specific market conditions deteriorated continuously. In this environment, ALTANA was unable to generate operating sales as high as in the previous year. Nonetheless, nominal sales increased due to significant exchange-rate influences and effects from acquisitions. But profitability did not quite reach the previous year’s level. Advantages from a lower materials cost ratio were overcompensated by increased personnel expenses.

However, we further strengthened our balance-sheet structures and increased our financial headroom in 2015.