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Course of Business and Economic Position

Group

Overview of 2019

  • Increase in Group net sales of 8.9% to € 16.2 billion; organic growth (5.3%) was supported by positive exchange rate effects (2.1%) and acquisition-related growth (1.4%)
  • Organic sales growth was achieved by the Life Science (9.0%) and Healthcare (6.2%) business sectors
  • EBITDA pre rose by 15.4% and amounted to € 4.4 billion (2018: € 3.8 billion)
  • Profitable growth for the Group: increase in EBITDA pre margin to 27.1% (2018: 25.6%)
  • Growth in earnings per share pre to € 5.56 (2018: € 5.10)
  • Increase in business free cash flow to € 2.7 billion (2018: € 2.5 billion)
  • Acquisition-related rise in net financial debt to € 12.4 billion (December 31, 2018: € 6.7 billion)
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Group
Key figures
      Change
€ million 2019 2018 € million %
Net sales 16,152 14,836 1,315 8.9%
Operating result (EBIT)1 2,120 1,727 393 22.8%
Margin (% of net sales)1 13.1% 11.6%    
EBITDA1 4,066 3,528 539 15.3%
Margin (% of net sales)1 25.2% 23.8%    
EBITDA pre1 4,385 3,800 585 15.4%
Margin (% of net sales)1 27.1% 25.6%    
Profit after tax 1,324 3,396 -2,072 -61.0%
Earnings per share (in €) 3.04 7.76 -4.72 -60.8%
Earnings per share pre (€)1 5.56 5.10 0.46 9.0%
Business free cash flow1 2,732 2,508 224 8.9%
1 Not defined by International Financial Reporting Standards (IFRSs).

Development of sales and results of operations

In fiscal 2019, the Group generated net sales of € 16,152 million (2018: € 14,836 million). This represented a year-on-year increase of € 1,315 million or 8.9%, to which all business sectors contributed. Organic sales growth for the Group amounted to € 790 million or 5.3% and was attributable to the Life Science (9.0%) and Healthcare (6.2%) business sectors. Performance Materials reported a decline in organic sales of -6.5%. Sales growth attributable to foreign exchange rates came to € 312 million or 2.1% and was primarily due to the U.S. dollar, the Japanese yen, and the Chinese renminbi; exchange rate developments in particular in some South American countries, such as Argentina and Brazil, had the opposite effect. Because of portfolio changes, Group net sales rose by € 213 million or 1.4%. This was essentially due to the acquisition, completed on October 7, 2019, of Versum Materials, Inc., United States (Versum Materials), and the completed acquisition of Intermolecular, Inc., United States (Intermolecular), on September 20, 2019, both of which supplement the semiconductor business of the Performance Materials business sector. The divestment in December 2018 of the flow cytometry business that was allocated to the Life Science business sector diminished sales.

The net sales in the individual quarters as well as the respective organic growth rates in 2019 are presented in the following graph:

Group 

Net sales and organic growth1 by quarter2

€ million/organic growth in %
Not defined by International Financial Reporting Standards (IFRSs).
Quarterly breakdown unaudited.

Driven by the gratifying organic sales growth of 9.0%, net sales of the Life Science business sector rose by 11.0% to € 6,864 million overall (2018: € 6,185 million). Life Science therefore was the strongest business sector in terms of sales with a share of 42% (2018: 42%) of Group sales in fiscal 2019. With organic growth of 6.2% and an exchange rate-related increase in sales of 1.3%, the Healthcare business sector recorded an overall rise in net sales of 7.5% to € 6,714 million (2018: € 6,246 million). In 2019, net sales of the Performance Materials business sector rose by 7.0% to € 2,574 million (2018: € 2,406 million). This was primarily due to acquisition-related sales growth (10.4%) and positive exchange rate effects (3.1%), which more than offset the decline in organic sales (-6.5%). Performance Materials thus generated 16% (2018: 16%) of net sales of the Group.

 

Group 

Net sales by business sector – 2019

€ million/% of net sales
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Group
Net sales by business sector
€ million 2019 Share Organic growth1 Exchange rate ­
effects
Acquisitions/­
divestments
Total change 2018 Share
Healthcare 6,714 42% 6.2% 1.3% 7.5% 6,246 42%
Life Science 6,864 42% 9.0% 2.6% -0.6% 11.0% 6,185 42%
Performance Materials 2,574 16% -6.5% 3.1% 10.4% 7.0% 2,406 16%
Group 16,152 100% 5.3% 2.1% 1.4% 8.9% 14,836 100%
1 Not defined by International Financial Reporting Standards (IFRSs).

In fiscal 2019, the Group recorded the following regional sales performance: 

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Group
Net sales by region
€ million 2019 Share Organic growth1 Exchange rate ­
effects
Acquisitions/­
divestments
Total change 2018 Share
Europe 4,735 29% 3.9% 3.9% 4,559 31%
North America 4,214 26% 3.9% 5.3% 1.1% 10.4% 3,818 26%
Asia-Pacific (APAC) 5,599 35% 6.7% 2.7% 3.3% 12.8% 4,965 33%
Latin America 1,012 6% 10.4% -3.8% 6.5% 950 6%
Middle East and Africa (MEA) 591 4% 5.2% 2.4% 1.0% 8.6% 544 4%
Group 16,152 100% 5.3% 2.1% 1.4% 8.9% 14,836 100%
1 Not defined by International Financial Reporting Standards (IFRSs).

The Consolidated Income Statement of the Group is as follows:

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Group
Consolidated Income Statement1
          Change
€ million 2019 % 2018 % € million %
Net sales 16,152 100.0% 14,836 100.0% 1,315 8.9%
Cost of sales -6,006 -37.2% -5,382 -36.3% -624 11.6%
Gross profit 10,145 62.8% 9,454 63.7% 691 7.3%
             
Marketing and selling expenses -4,576 -28.3% -4,396 -29.6% -180 4.1%
Administration expenses -1,154 -7.1% -1,183 -8.0% 29 -2.5%
Research and development costs -2,268 -14.0% -2,227 -15.0% -41 1.8%
Impairment losses and reversals of impairment losses on financial assets (net) -8 -0.0% 27 0.2% -35 100.0%
Other operating income and expenses -19 -0.1% 52 0.3% -71 100.0%
Operating result (EBIT)2 2,120 13.1% 1,727 11.6% 393 22.8%
             
Financial result -385 -2.4% -266 -1.8% -119 44.6%
Profit before income tax 1,735 10.7% 1,461 9.8% 275 18.8%
             
Income tax -440 -2.7% -368 -2.5% -72 19.7%
Profit after tax from continuing operations 1,296 8.0% 1,093 7.4% 203 18.5%
Profit after tax from discontinued operation 28 0.2% 2,303 15.5% -2,275 -98.8%
Profit after tax 1,324 8.2% 3,396 22.9% -2,072 -61.0%
             
Non-controlling interests -3 -0.0% -22 -0.2% 19 -85.1%
Net income 1,320 8.2% 3,374 22.7% -2,053 -60.9%
1 Previous year’s figures have been adjusted, see Note (45) “Effects from new accounting standards and other presentation changes” in the Notes to the Consolidated Financial Statements.
2 Not defined by International Financial Reporting Standards (IFRSs).

The positive development of net sales led to an increase of 7.3% in gross profit of the Group to € 10,145 million (2018: € 9,454 million). The resulting gross margin of the Group, i.e. gross profit as a percentage of net sales, amounted to 62.8% (2018: 63.7%). Group-wide research and development costs rose by 1.8% to € 2,268 million and led to a research spending ratio (research and development costs as a percentage of net sales) of 14.0% (2018: 15.0%). Accounting for 75% (2018: 77%) of Group R&D spending, Healthcare remained the most research-intensive business sector of the Group.

Group 

Research and development costs by business sector1 – 2019

€ million/%
Not presented: research and development costs of € 59 million allocated to Corporate and Other

Other operating income and expenses showed an expense balance of € 19 million in 2019, after an income balance of € 52 million in 2018. Detailed information about the development and composition of other operating expenses and income can be found in Note (15) “Other operating income” and Note (16) “Other operating expenses” in the Notes to the Consolidated Financial Statements.

The further deterioration of the financial result of 44.6% to € –385 million (2018: € –266 million) resulted mainly from higher interest expenses due to new borrowings of financial liabilities to finance the acquisition of Versum Materials. Details with respect to the development of finance income and finance expenses of the Group are shown in Note (40) “Financial income and expenses/Net profit and losses from financial instruments” in the Notes to the Consolidated Financial Statements.

Income tax expense came to € 440 million in 2019 (2018: € 368 million) and resulted in a tax rate of 25.3% (2018: 25.2%). Further information on income taxes are included in Note (17) “Income taxes” in the Notes to the Consolidated Financial Statements.

Profit after tax from discontinued operations of € 28 million (2018: € 2,303 million) resulted from the sale of the Consumer Health business in December 2018 and arose from subsequent effects in connection with the transaction. This profit must be reported separately in the Consolidated Income Statement pursuant to IFRS 5. The high figure for 2018 essentially includes the profit from the sale of the Consumer Health business amounting to € 2,244 million. Further information on the divestment of the Consumer Health business can be found in Note (5) “Acquisitions and divestments” in the Notes to the Consolidated Financial Statements.

The decline in net income of -60.9% to € 1,320 million (2018: € 3,374 million) was mainly attributable to the profit from the sale of the Consumer Health business realized in 2018. Earnings per share accordingly decreased to € 3.04 (2018: € 7.76).

EBITDA pre, the key financial indicator used to steer operating business, rose by € 585 million, or 15.4%, to € 4,385 million (2018: € 3,800 million). The organic increase in this key performance indicator was 11.3%. It included favorable effects from the application of IFRS 16 “Leases” amounting to € 143 million. Furthermore, the development of EBITDA pre was positively influenced by foreign exchange effects and portfolio effects. Relative to net sales, the EBITDA pre margin was 27.1% in 2019 (2018: 25.6%). The reconciliation of the operating result (EBIT) to EBITDA pre is presented in the chapter entitled “Internal Management System”.

The development of EBITDA pre in the individual quarters in comparison with 2018 as well as the respective growth rates are presented in the following overview:

Group 

EBITDA pre1 and change by quarter2

€ million/change in %
Not defined by International Financial Reporting Standards (IFRSs).
Quarterly breakdown unaudited.

All business sectors contributed to the growth in Group EBITDA pre. Life Science, the business sector with the highest EBITDA pre, generated a 15.7% increase to € 2,129 million (2018: € 1,840 million) in fiscal 2019. At the same time, the EBITDA pre margin of this business sector also rose to 31.0% (2018: 29.8%). EBITDA pre of Healthcare even increased by 23.5% to € 1,922 million in 2019 (2018: € 1,556 million). The resulting EBITDA pre margin improved substantially to 28.6% (2018: 24.9%). The share of Group EBITDA pre accounted for by Healthcare (not taking into account the € –469 million reduction due to Corporate and Other) rose by 3 percentage points to 40% (2018: 37%). With an EBITDA pre of € 803 million (2018: € 786 million), the share of this Group key performance indicator attributable to Performance Materials decreased to 16% (2018: 19%). The EBITDA pre margin declined slightly to 31.2% (2018: 32.7%).

Group 

EBITDA pre1 by business sector2 – 2019

€ million/%
Not defined by International Financial Reporting Standards (IFRSs).
Not presented: Decline in Group EBITDA pre by €–469 million due to Corporate and Other.
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Group
Balance sheet structure1            
Dec. 31, 2019 Dec. 31, 2018 Change
  € million % € million % € million %
Non-current assets 34,808 79.4% 27,652 75.0% 7,155 25.9%
thereof:            
Goodwill 17,141   13,764   3,377  
Other intangible assets 9,175   7,237   1,938  
Property, plant and equipment2 6,213   4,811   1,402  
Other non-current assets 2,278   1,840   438  
             
Current assets 9,003 20.6% 9,236 25.0% -232 -2.5%
thereof:            
Inventories 3,342   2,764   577  
Trade and other current receivables 3,488   3,226   262  
Other current financial assets 57   29   28  
Other current assets 1,336   1,048   289  
Cash and cash equivalents 781   2,170   -1,390  
             
Total assets 43,811 100.0% 36,888 100.0% 6,923 18.8%
             
Equity 17,914 40.9% 17,233 46.7% 681 4.0%
             
Non-current liabilities 14,056 32.1% 11,138 30.2% 2,918 26.2%
thereof:            
Provisions for pensions and other post-employment benefits 2,957   2,336   620  
Other non-current provisions 490   780   -290  
Non-current financial debt2 8,644   6,681   1,963  
Other non-current liabilities 1,965   1,340   624  
             
Current liabilities 11,842 27.0% 8,517 23.1% 3,324 39.0%
thereof:            
Current provisions 933   600   333  
Current financial debt2 4,550   2,215   2,336  
Trade and other current payables/refund liabilities 2,618   2,238   380  
Other current liabilities 3,740   3,464   276  
             
Total equity and liabilities 43,811 100.0% 36,888 100.0% 6,923 18.8%
1 Previous year’s figures have been adjusted, see Note (45) “Effects from new accounting standards and other presentation changes” in the Notes to the Consolidated Financial Statements.
2 The first-time application of IFRS 16 led to an increase in property, plant and equipment as well as financial debt as of January 1, 2019; see Note (45) “Effects of new accounting standards and other presentation changes” in the Notes to the Consolidated Financial Statements.

The total assets of the Group amounted to € 43,811 million as of December 31, 2019 (December 31, 2018: € 36,888 million), representing an increase of 18.8% or € 6,923 million. The main reason for the strong increase in total assets and the development of the balance sheet items was the first-time consolidation of Versum Materials (see Note (5) “Acquisitions and divestments” in the Notes to the Consolidated Financial Statements). Due to exchange rate changes, total assets rose by around € 0.4 billion.

The growth in working capital of 13.2% to € 3,944 million (December 31, 2018: € 3,486 million) was largely attributable to the acquisition-related inventory build-up and increase in receivables.

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Group
Working capital1        
      Change
€ million Dec. 31, 2019 Dec. 31, 2018 € million %
Trade accounts receivable 3,174 2,931 243 8.3%
Receivables from royalties and licenses 45 29 17 57.9%
Inventories/right of return for goods already delivered 3,344 2,764 579 21.0%
Trade and other current payables/refund liabilities -2,618 -2,238 -380 17.0%
Working capital1 3,944 3,486 459 13.2%
1 Not defined by International Financial Reporting Standards (IFRSs).

The composition and the development of net financial debt were as follows:

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Group
Net financial debt1        
      Change
€ million Dec. 31, 2019 Dec. 31, 2018 € million %
Bonds and commercial paper 10,059 7,286 2,773 38.1%
Bank loans 1,587 620 967 >100.0%
Liabilities to related parties 809 824 -16 -1.9%
Loans from third parties and other financial debt 97 72 25 34.9%
Liabilities from derivatives (financial transactions) 76 90 -14 -15.2%
Lease liabilities2 567 4 563 >100.0%
Financial debt 13,194 8,896 4,299 48.3%
less:        
Cash and cash equivalents 781 2,170 -1,390 -64.0%
Other current financial assets3 50 24 26 >100.0%
Net financial debt1 12,363 6,701 5,663 84.5%
1 Not defined by International Financial Reporting Standards (IFRSs).
2 The first-time application of IFRS 16 led to an increase of €465 million as of January 1, 2019.
3 Excluding current derivatives (operational).
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Group
Reconciliation of net financial debt1    
€ million 2019 2018
Jan. 1 6,701 10,144
Currency translation difference 79 126
Change in lease liabilities2 663
Dividend payments3 689 768
Acquisitions3 5,020
Payments for/proceeds from the disposal of assets held for sale3 110 -3,129
Transfer of financial debt due to acquisitions 966
Free cash flow1 -1,889 -1,301
Other 24 93
Dec. 31 12,363 6,701
1 Not defined by International Financial Reporting Standards (IFRSs).
2 Thereof € 465 million due to the first-time application of IFRS 16 as of January 1, 2019.
3 According to the Consolidated Cash Flow Statement.

In 2019, equity of the Group rose by 4.0% to €17,914 million (December 31, 2018: €17,233 million). The increase in equity was essentially due to profit after tax generated in fiscal 2019 (€1.3 billion). Opposing effects resulted from dividend payments and profit distribution (€0.7 billion) (see “Consolidated Statement of Changes in Net Equity” in the Consolidated Financial Statements). Despite the increase in equity, the equity ratio declined by around 6 percentage points to 40.9% (December 31, 2018: 46.7%) due to the aforementioned rise in total assets. The composition of free cash flow as well as the development of the relevant items are presented in the following table:

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Group
Free cash flow1        
      Change
€ million 2019 2018 € million %
Cash flow from operating activities according to the consolidated cash flow statement 2,856 2,219 637 28.7%
Payments for investments in intangible assets -208 -106 -102 95.8%
Proceeds from the disposal of intangible assets 23 67 -44 -65.6%
Payments for investments in property, plant and equipment -813 -910 98 -10.7%
Proceeds from the disposal of property, plant and equipment 31 31 -1 -2.3%
Free cash flow1 1,889 1,301 588 45.2%
1 Not defined by International Financial Reporting Standards (IFRSs).

For further information on the impact of the first-time application of IFRS 16 “Leases” on the consolidated cash flow statement, please refer to Note (41) “Net cash flows from financing activities” in the Notes to the Consolidated Financial Statements.

In fiscal 2019, the Group generated business free cash flow of € 2,732 million (2018: € 2,508 million). The increase was mainly attributable to a higher EBITDA pre. The composition of business free cash flow is presented in the chapter entitled “Internal Management System”.

The distribution of business free cash flow across the individual quarters and the percentage changes in comparison with 2018 were as follows:

Group 

Business free cash flow1 and change by quarter2
€ million/change in %
Not defined by International Financial Reporting Standards (IFRSs).
Quarterly breakdown unaudited.

Group 

Business free cash flow1 by business sector2 – 2019

€ million/%
Not defined by International Financial Reporting Standards (IFRSs).
Not presented: decline in Group business free cash flow by € –536 million due to Corporate and Other.

The contributions of the operating business sectors to business free cash flow of the Group in 2019 developed as follows: Life Science generated business free cash flow amounting to € 1,375 million (2018: € 1,393 million). Consequently, with a 42% share (2018: 46%) of Group business free cash flow (excluding the decline of € –536 million due to Corporate and Other), Life Science was the business sector with the highest cash inflows. In 2019, the Healthcare business sector showed a double-digit increase of 22.2% to € 1,252 million (2018: € 1,025 million), thus contributing a share of 38% to Group business free cash flow (2018: 34%). With business free cash flow of € 641 million (2018: € 588 million), Performance Materials contributed 20% (2018: 20%) to this Group key performance indicator.

Investments in property, plant, equipment, and software, as well as advance payments for intangible assets included in the calculation of business free cash flow, rose in 2019 by 10.1% to € 1,026 million (2018: € 932 million). The investments in property, plant, and equipment included therein amounted to € 1,104 million in 2019 (2018: € 890 million), of which € 497 million (2018: € 480 million) was attributable to strategic investment projects each with a project volume of more than € 2 million; the remainder was attributable to smaller investment projects.

In 2019, strategic investments of € 116 million (2018: € 161 million) were made to expand our site in Darmstadt, of which the Performance Materials business sector invested € 20 million in a new research center and € 15 million in a silica production facility. The Life Science business sector invested € 11 million in a new membrane production plant.

Outside Germany, high levels of strategic investments were made particularly in Switzerland (€ 105 million), China (€ 60 million), and the United States (€ 54 million). In Switzerland, the Healthcare business sector invested € 34 million in a new development center to produce biotechnological products and € 30 million in a new production building for bottling these products. In China, Life Science invested € 16 million in a production campus; Healthcare invested € 13 million in a logistics center. The United States saw a Healthcare investment of € 15 million in the expansion of the research and development center in Billerica, Massachusetts.

Our credit ratings from the independent rating agencies did not change in 2019. Our company is currently rated by Standard & Poor’s, Moody’s, and Scope. Standard & Poor’s has issued a long-term credit rating of A with a stable outlook, Moody’s a rating of Baa1 with a stable outlook, and Scope a rating of A–, likewise with a stable outlook. An overview of the development of our rating in recent years is presented in the Report on Risks and Opportunities.


 The development of key balance sheet figures was as follows:

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Group
Key balance sheet figures            
%    Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015
Equity ratio1 Total equity 40.9% 46.7% 39.5% 36.7% 33.8%
Total assets
Asset ratio1 Non-current assets 79.4% 75.0% 79.1% 80.0% 80.7%
Total assets
Asset coverage1 Total equity 51.5% 62.3% 49.9% 45.9% 41.8%
Non-current assets
Finance structure1 Current liabilities 45.7% 43.3% 40.1% 37.5% 37.2%
Liabilities (total)
1 Not defined by International Financial Reporting Standards (IFRSs).

Overall assessment of business performance and economic situation

In fiscal 2019 we continued to implement our strategy in a disciplined fashion and reached important milestones. The financial targets we had set ourselves for 2019 were reached or even exceeded. In particular, we were able to return to profitable growth. Group sales in fiscal 2019 rose by 8.9% to € 16,152 million and EBITDA pre, the key financial indicator used to measure operating business, grew by 15.4% to € 4,385 million. All business sectors contributed to this success.

We also realized important strategic milestones in respect of the Group’s long-term orientation: following the takeovers of Versum Materials and Intermolecular, our Performance Materials business sector is in a very good position to become a leading provider on the market for electronic materials, and to push further ahead with future innovations in this field. Our research results in Healthcare are promising. The United States Food and Drug Administration (FDA) has approved our therapy Mavenclad® for the treatment of specific forms of multiple sclerosis in the United States. Our cancer immunotherapy Bavencio® was granted approval in the United States, Europe, Japan, and in other markets for the treatment of patients with locally advanced kidney cancer in combination with another medicine. We entered into a global strategic alliance with GlaxoSmithKline to push further ahead with the clinical development of new therapy bintrafusp alfa to fight cancers that are difficult to treat. In Life Science, we made progress with our genome editing technologies. Last year we received further patents in this important area. All told, we now hold more than 22 patents for CRISPR technologies worldwide.

The solid accounting and financing policies of the Group find expression in persistently good key balance sheet figures. The equity ratio as at December 31, 2019, was 40.9% (December 31, 2018: 46.7%) and thus remains at a very good level. Due to the acquisition of Versum Materials, net financial debt as of December 31, 2019, rose to € 12,363 million (December 31, 2018: € 6,701 million). To achieve a rapid reduction of financial liabilities we are focusing on generating organic growth and on high inflows of financial resources from operating business activities.

Based on our solid net assets and financial position, and our profitable operations, we view the economic situation of the Group as positive overall. Thanks to our leading position in science and technology we are able to look to the future with optimism.