Future Orientation of the Group
We do not plan on making any fundamental changes to the Group’s strategy or organizational structure in the next two years. The focus on specialty markets and the offer of innovative chemical solutions will continue to drive our business development.
We do not expect our entry into new market segments or application areas to lead to any significant changes in our sales structure in the medium term. We also expect the regional sales distribution to basically remain stable.
Acquisitions, however, could lead to changes in our sales and market structures. Bolt-on acquisitions and particularly the integration of a new business division could result in a shift.
Economic and Industry Outlook
We do not expect the overall economic situation to change fundamentally in 2016 compared to 2015. The International Monetary Fund (IMF) forecasts an increase of 3.4 % in world economic output, slightly higher than the 2015 growth.
This development should be driven both by stronger growth momentum in the emerging countries and further growth in the established industrial nations. The highest growth rates for 2016 are forecast for the emerging Asian economies. The IMF estimates that the momentum in India and the ASEAN-5 states will pick up slightly, while China’s growth will continue to slow down. For China, a positive economic development of 6.3 % is predicted (previous year: + 6.9 %). An unchanged growth rate is forecast for the U.S. (+ 2.6 %). In Europe, the economic recovery is expected to continue. Economic output of 1.7 % is anticipated for the whole Euro zone including Germany. For the Brazilian and Russian economies, the IMF expects continued recession in 2016. Given the prospects for the global economy in 2016, growth in the general chemical sector is expected to be slightly higher than in the previous year. The American Chemistry Council (ACC) forecasts that worldwide chemical production will increase by 3.3 % in 2016, after an expected 2.8 % last year. However, this growth will be driven solely by the chemical industry in the emerging countries. The latter’s manufacture of chemical products is expected to be 4.8 % higher in 2016, whereas industry growth in the established countries is expected to remain at the previous year’s level of 2.6 %.
We assume that in this market environment general demand on the markets relevant for ALTANA will basically remain stable, although the regions will show different developments. The extent to which changes in storage levels along the value chain will influence the actual demand for the products of our divisions largely depends on the expected short- to medium-term development. Stock-level changes can lead to significant effects.
The development of crude-oil prices cannot be predicted reliably due to the high volatility in recent months and on account of the current geopolitical conflicts. The availability, pricing, and consumption volume of chemical products are subject to the influence of the crude-oil market, albeit to different extents. In addition, the expectations of market participants in terms of the future development of oil prices can result in significant changes in the level of storage along the value chain in the chemical industry.
As in the previous years, the volatility of the exchangerate relations important for ALTANA will continue in 2016. The development of regional interest rates and economic output, as well as political influences can be of decisive importance for exchange-rate fluctuations. Since the intensity and direction of the exchange rates cannot be predicted, it is not possible to make concrete statements about the influence.
Expected Earnings, Asset, and Financial Situation
Expected Sales and Earnings Performance
On the basis of the expected growth for the global economy, we expect the demand for our products and services to exhibit a positive development in the new fiscal year. We expect our operating sales growth, i. e. sales growth adjusted for exchange-rate and acquisition effects, to range from 2 to 5 %. An increase in the sales volume should be the main growth driver, while the price effect based on lower crude-oil prices might even be negative.
The increase in nominal sales can deviate from the operating sales development due to exchange-rate changes and possible acquisitions or portfolio adjustments. For the most part, operating sales in the divisions should grow at a similar pace to Group operating sales.
In terms of the important cost factors, we do not expect significant shifts of cost ratios in relation to sales. We expect the materials cost ratio to generally develop stably. For the growth of personnel expenses and other fixed cost figures, we expect a relative increase at the same level as or slightly lower than sales growth.
We expect the EBITDA to increase disproportionately to the sales development, primarily due to the non-recurrence of the restructuring-related special expenses that existed in 2015. We therefore anticipate that the EBITDA margin will lie in the upper half of our long-term target range of 18 to 20 %.
After 2016, we expect slightly stronger growth momentum with roughly the same or even slightly improved profitability.
Expected Asset and Financial Situation
We do not expect any significant shifts in the balance-sheet structure in 2016. Our capital expenditure for property, plant and equipment and intangible assets should remain within our long-term target range of 5 to 6 %. The development of the absolute values of net working capital should be analogous to the general business development, though we are striving to improve the ratios.
Based on the anticipated business performance, we will achieve significant liquidity surpluses from operating activities, which should be at a level similar to that of 2015. These surpluses will be used to finance investments, for bolton acquisitions, and to pay dividends. The promissory note loans will be repaid from 2016 to 2020.
We foresee a further slight improvement of the value management key figures in 2016 due to a disproportionate increase in operating earnings compared to operating capital.
Management and control of the ALTANA Group are geared to the strategy that has been defined and the target levels derived from it. Due to changes in the economic environment or internal factors of influence, it might not be possible to implement the strategy successfully or to achieve target levels in the planned time frame or to the planned extent. To be optimally prepared for such situations, we systematically identify, evaluate, and consider risks within the framework of decision-making processes.
To anchor our risk policy at all decision-making levels, we established a Group-wide risk management system that brings together various information, communications, and monitoring systems. Core elements of our risk management include strategic corporate planning, internal reporting, our internal control system, compliance organization, and risk management in the strict sense, i. e. the identification, documentation, and evaluation of risks including the derivation of appropriate precautionary measures and countermeasures. Our strategic corporate planning is closely tied to our medium- to long-term financial planning. The extent of the fulfillment of our targets is examined in monthly reports on the company’s business performance and in our shortterm financial planning. Deviations can be recognized and countermeasures introduced if necessary.
Our internal control system, which is oriented to the standards of the internationally recognized COSO model, defines organizational measures for preventing damage from being done to the company. In connection with our established compliance organization, it aims to prevent possible violations of guidelines and laws on the part of employees.
At ALTANA, risk management in the strict sense is viewed as the systematic compilation, evaluation, documentation, and communication of relevant risks. Thus it is an essential component of the company’s system for early risk recognition in accordance with section 91 (2) of the German Stock Corporation Act. This system was voluntarily examined by the auditor and was deemed capable of recognizing risks that can endanger the existence of the company at an early stage.
Risks that are identified are evaluated in a uniform way. The risk is assessed based on the probability of its occurring and the potential damages. Individual risks can be rated based on this assessment. Risks rated as very high are risks which could cost the company € 25 million or more in the next 12 months. Individual risks that could cost the company between € 12 million and € 25 million are rated as high risks; risks that would cost between € 5 million and € 12 million are categorized as medium risks, and risks that would cost less than € 5 million are deemed low risks. The prioritization resulting from the assessment determines focal points for the development and initiation of countermeasures and strategies to prevent or reduce the potential effects of risks.
The individual risks and risk fields described in the following pages could have a material adverse effect on the Group’s earnings, financial, and asset situation in the years to come and thus give rise to a negative deviation from the forecast development. For individual risks categorized as “medium” and “high” we address changes in our appraisal compared to the previous year. In 2015, risks categorized as “very high” were not identified.
Economic and Industry Risks
The development of the general economic conditions worldwide has a decisive impact on our business performance. The performances of the important U.S., Chinese, and German economies have a particularly strong impact on the direction and intensity of demand for our products.
A global economic crisis leading to an economic collapse would bring about significant sales decreases with corresponding influences on our earnings. Recessions limited to certain regions in sales markets important for us could also significantly impair our business performance. With the global orientation of our sales activities, we try to shape our dependence on regional or national markets in such a way that the effects of geographically confined economic crises on the Group are limited. Thus, our largest market currently accounts for 20 % of total Group sales. The distribution of our business activities in the core regions of Europe, Asia, and the Americas also has a balanced structure.
At the same time, we continually update our appraisal of the regional economic development in our internal reporting system to be able to react to foreseeable effects by controlling our procurement, production, and sales activities. We react to long-term shifts in regional economic performance by adjusting our sales and local production structures.
In addition to general economic risks, there are marketrelated sales risks concerning individual product groups or application areas. Particularly medium- to long-term trends that structurally lead to a decrease in demand in our target markets can mean that we will not achieve our growth and profitability targets. We try to control industry-related sales risks by broadly diversifying our offer. We supply many different industries, which in turn sell their end products in various markets. Therefore, our dependence on the underlying consumer segments is limited. We estimate that no single consumer segment (e. g. the automotive industry) accounts for more than 20 % of our sales.
The analysis of our industry-specific and applicationrelated sales is an elementary component of our annual strategy process. In addition, we examine changes in future growth potential arising from demand trends and technological developments, and adjust our strategic orientation in the divisions if necessary.
The occurrence of a global economic crisis or the emergence of regional economic crises, are two significant economic and industry risks that are rated as “high” or “medium” risks. In the 2015 fiscal year, we did not assess the probability of these risks occurring as being different from the previous year. Due to the measures implemented and our increased diversification, we estimate potential damages to be slightly lower than in the previous year.
Sales risks result mainly from intensified competition or shifts in customer structure. They include risks for individual products or product groups due to specific demand trends.
This can lead to decreasing sales revenues, which can be caused by declining sales volumes or falling prices. Since in many cases the cost structure cannot be adjusted in the short term, this can lead to a drop in profitability.
We counter sales risks by continually optimizing our product and service portfolio, above all on the basis of our innovative ability. In the process, it is decisive that we cooperate closely with customers at an early stage of development work to adapt to market needs. With our innovation strategy, we can counter increased competition in our markets.
A loss of customers, mergers, or backward integration of customers can lead to major changes in the customer structure. Due to our very diversified customer structure, however, these risks are limited. In addition, we cooperate closely with our core customers within the framework of our key account management.
In the year under review, we did not make any fundamental changes to our assessments of the probabilities of occurrence and loss potential from sales risks.
Risks from Company Acquisitions and Investments
Apart from operating growth, acquisitions play a key role for the implementation of the strategy for profitable growth at ALTANA. Depending on the size of the activities acquired, unsuccessful integration can place a burden on the Group’s earnings situation and limit its financial headroom. In addition, a business performance that is worse than what was expected when the acquisition was made can lead to impairments of assets with a negative impact on earnings.
To minimize the effects of the risks from company acquisitions, we examine our acquisition targets systematically and comprehensively and analyze them in detail in a multistage approval process.
The assessment of the risk of impairments of assets from acquisitions is lower than it was last year. This is due to a decrease in the probability of occurrence with the same potential damages.
The impairment risk is therefore categorized now as being a medium risk.
Limited availability of certain raw materials or substantial rawmaterials price increases that we cannot or can only partially pass on to the markets in the short term constitute the primary procurement risks. These can have a negative impact on the Group’s earnings situation.
We continually analyze the situation on the raw-materials markets that are relevant for ALTANA. By doing so, we can identify price trends and structural shifts on the part of suppliers at an early stage and devise suitable measures. We take this knowledge into account when we arrange supply contracts. In addition, we take account of the volatility of raw-material prices in our customer relations. To be able to pass on price increases to the markets in the short term, we increase the flexibility of price mechanisms and price lockup periods.
Financial Market Risks
Financial market risks primarily concern short-term and significant changes in exchange-rate relations and interest rates, as well as default risks and the covering of financial resource needs.
Due to exchange-rate fluctuations, the translation of foreign currency values into the Group currency, the Euro, can have a negative effect on the Group’s sales and earnings performance (translation risks). Such negative effects can also result from business conducted in a foreign currency (transaction risks). We still categorize translation risk as being a medium risk, but with a higher relevance. Interestrate changes influence financing costs. Defaults on trade accounts receivable or financial receivables can also have a negative effect on the Group’s earnings situation and its financial resources. If there is a lack of availability of financial resources for the implementation of acquisitions or major investment projects, we might not reach our strategic targets.
We safeguard against material transaction risks by concluding forward foreign-exchange contracts in cases where we assume that the underlying business can be realized with a sufficient degree of certainty. The total amount expected is safeguarded in different tranches to offset shortterm exchange-rate fluctuations. We generally counter risks resulting from changes in interest rates by hedging interest rates over the corresponding term of the respective underlying transaction. More information on our evaluation and accounting procedures for hedges can be found in the Notes on page 123 ff. (note 27). To minimize credit default risks, we systematically examine the credit rating and payment behavior of our counterparties. The latter include customers, the banks we do business with, and other business partners where payment default can have an influence on our financial situation.
We safeguard availability of financial resources through central control and monitoring of our Group-wide financial resources. In addition, by utilizing various financing instruments, we centrally provide a financial resources framework that covers medium-term needs going beyond the planned financial cash inflow from our operating business.
We reduced our assessment of the financial market risks in comparison to the previous year. Continued high cash inflows from operating business activity and the existing general financial resources framework suffice to cover the expected cash outflows for investments, repayments, and dividends.
ALTANA’s position as an innovation and technology leader is a major success factor for the company. It is important for a supplier of highly specialized chemical products to continually introduce new products on the market and to be perceived by our customers as a competent and innovative partner. If this was no longer the case in the future, risks could result for our sustainable growth, the attainment of our profitability targets, and ALTANA’s positioning in the relevant markets. The same applies if competitors patent knowhow that we use but have not protected, as we would then no longer be able to use it, or only at additional cost.
With our innovation culture, which is put into practice at all levels of our organization, we highlight the importance of innovation and safeguard its status. Both at a decentralized and a Group level, we continually evaluate and control our research and development activities based on financial and non-financial criteria. By investing above-average amounts in research and development and focusing on product adjustments and new developments, we can continually introduce products on the market that are tailored to customers’ individual and current needs and thus heighten our competitive edge.
It is important to protect knowhow we develop with patents to convert our knowledge edge into economic success. This includes safeguarding technologies as well as methods and product properties we currently use so that other companies cannot patent them.
2015 saw no significant change in our assessment of innovation risks in comparison to the previous year.
Production risks concern technical disruptions or human failure in production plants that can be harmful to people or the environment. Our goal is to minimize the effects of machine failure on the value chain by operating production lines independently from one another. It is compulsory for our staff to receive training in the clearly defined process and quality standards in the areas in question. In addition, we conclude property damage as well as plant and equipment breakdown insurances.
Information technologies form the basis of nearly all of ALTANA’s business and communications processes. Breakdowns or other disruptions of IT systems can lead to far-reaching impairments in all of the Group’s value-added stages, which can have significant effects on business performance (IT risks). In addition, potential risks arise from data loss or theft of business secrets. ALTANA attaches great importance to smooth availability of IT applications and services. To guarantee this, corresponding processes and organizational structures have been established. Emergency plans are in place in case of significant disruptions or losses of data.
Delivery of faulty products can cause damage to people, property, or the environment and thus cause liability risks. This can have significant effects on the Group’s asset situation. We minimize this risk by standardizing production processes to a large extent and by taking comprehensive quality-control measures. In addition, we continually conduct analyses to assess the hazardous potential of our input materials and products, and we conclude insurances.
Changes in political and regulatory framework conditions can lead to restrictions on trade or foreign-exchange transactions. Due to political unrest, it can be more difficult or even impossible to access the Group’s assets in the country or countries in question. On account of regulatory adjustments, it might no longer be possible to sell certain products or ingredients, or only with strong restrictions. We continually examine the political environment in the countries important for us and take current tendencies into account when evaluating business relationships. We only make direct investments in countries in which we assume the political environment is highly stable. We actively take part in legislative procedures and discussions focusing on changes in the regulatory environment. As a result, we can anticipate possible new requirements early on.
Legal violations (compliance risks) can give rise to liability risks or tarnish our reputation, which can have a significant effect on the Group’s earnings and asset situation. We counter these risks within the framework of our compliance management system, inter alia by regularly informing our employees about legal requirements and providing them with training.
An important basis for long-term success are competent and committed employees. Should we no longer be able to recruit or retain suitable specialists or managers in the future, risks could arise for the successful implementation of our strategy (personnel risks). To counter these risks, ALTANA offers a sophisticated work environment and an attractive compensation system, which is supplemented by various pension plans and wealth creation schemes. Moreover, we regularly offer further education and training programs to budding junior staff members, as well as to specialized and managerial staff.
Compliant Group Accounting
Essential accounting-related risks arise particularly when extraordinary or non-routine issues are handled. These include the first-time consolidation of acquired companies or parts of companies as well as the recording of the sale of Group assets. Accounting of financial instruments is also subject to risks due to the complex evaluation structure. Risks also arise from fraudulent acts.
At ALTANA, a separate department of the Group’s holding company coordinates and monitors Group accounting. A core component of the control system are the guidelines, process descriptions, and deadlines that this department defines centrally for all companies, guaranteeing a standardized procedure for preparing the financial statements. For complex issues, the instruments needed for uniform accounting are retained centrally for all Group companies. For recording extraordinary processes and complex special issues, we regularly obtain external reports, advice, and statements.
The financial statements of the individual Group companies are prepared decentrally by the local accounting departments. Hence the individual companies are responsible for preparing the financial statements, in keeping with Group guidelines and country-specific statutory accounting requirements. The work steps needed to prepare the financial statements are defined such that important process controls are already integrated. These include guidelines pertaining to the separation of functions and allocation of responsibilities, to control mechanisms, and to IT system access regulations. The respective management explicitly confirms to the Group’s management that the annual financial statements are correct and complete. In addition, important financial statements are audited by the company or Group auditors in charge.
The local accounting statements are recorded and consolidated via standardized formats and processes in a central IT system. At the divisional and holding-company levels numerous manual and IT-assisted control mechanisms are applied. They encompass an analysis and a plausibility examination of the registered data and the consolidated results by Group accounting as well as by the controlling department and other departments with expertise in this area. Required corrections of the information in the financial statements are generally made at the level of the individual company to ensure that the data are uniform and are transferred.
The company auditor and the Group auditor examine issues, processes, and control systems relevant for the generation of financial statements. The auditor reports on the audit directly to the Supervisory Board and the Audit Committee. In certain cases, audits are carried out by the central Internal Audit department.
After each process related to the preparation of the financial statements, optimization potential identified at the different levels is discussed and necessary adjustments of the processes are made.
The identification and evaluation of opportunities for our future business development is integrated into the different planning, analysis, and control processes.
Within the framework of strategic planning, we analyze demand trends as well as market and technology developments with regard to options for action that could enable ALTANA to create value. In addition, the divisions continually examine possibilities of developing new sales markets. During the financial planning process, the effects of action options are evaluated and discussed so that we can optimally exploit future opportunities. Finally, possible opportunities for short-term business development, along with the attendant risks, are dealt with in detail at all levels of management.
Below, major opportunities are described that could lead to ALTANA’s surpassing its short-, medium-, or long-term goals. The order corresponds to our assessment of the effects on our business performance.
Economic and Industry Development
Should the economic environment in the established industrial regions important for ALTANA, and particularly in the U.S. and Europe, develop better than we anticipated, unexpected growth impetus could arise. As a result, demand for our products and services could develop more positively and exceed our forecast. The same applies to growth in the important emerging countries in Asia and South America. If the growth rates in these nations were higher than expected, we might be able to benefit from this to a disproportionately high extent due to our market positions.
In addition to regional factors, growth impetus can also result from individual branches of industry. Further potential could be opened up, in particular, if the automotive sector showed a positive development, if the construction industry rebounded more quickly than expected, or if there was a trend reversal concerning the use of silver and gray colors in the consumer sector.
We have to continually streamline our product and service portfolio to be able to continue to implement our strategy for profitable growth in the long term. Should ALTANA manage to enhance its innovativeness more quickly than expected or to increase its share of new products for which there is a high demand beyond the target level, there would be even better prospects for growth. The same applies if we entered new markets or opened up new application fields for our products.
Company Acquisitions and Portfolio Measures
Acquisitions play a key role in ALTANA’s long-term value creation. In recent years, we have continually advanced the Group strategically due to acquisitions. At the same time, we cleansed our portfolio of those activities that were not in line with our strategic aims and for which there were no longterm value-creation perspectives within the Group.
In the future, we intend to continue to boost our growth by acquiring companies and activities. This is an essential prerequisite for us to achieve our strategic growth targets. Should opportunities arise in the future that exceed our expectations, these new activities could help us strengthen our market positions and open up new market segments. This, in turn, could help us achieve our strategic targets more quickly.
The ALTANA Group is decentralized to a large extent. Still, in some areas of the value-creation chain and in certain management functions, central units support the divisions and play a coordinating role. If we manage to push forward the networks within the Group more strongly than expected, this may spawn further potential to improve efficiency.
The Management Board’s Overall Statement on the Anticipated Development of the Group Including Its Overall View of the Risk and Opportunity Situation
In 2016, we expect the economy to show growth similar to that of the previous year. In this environment, we expect slight operating sales growth and improved earnings profitability. Due to the high stability of our operating capital, the key figures for value management should improve slightly.
We believe that the risk of burdens from a muted or even recessive development of the global economy or in important core regions continues to be palpable. In addition, considerable risks to our short-term sales and earnings performance are posed by the higher price volatility on the raw-materials markets and by short-term exchange-rate fluctuations. Overall, we have not found any risks that could endanger the continued existence of the company. The risks we face are set against numerous opportunities that could enable us to achieve sales and earnings performance surpassing our forecasts.
In sum, we expect to be able to successfully implement our strategy to sustain profitable growth in the coming years as well.