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Report on Expected Developments1

1 Owing to the altered expectations in terms of the impact of the Covid-19 pandemic, this Report on Expected Developments was updated accordingly on May 12, 2020.

The following report provides a forecast for fiscal 2020 of the development of the Group and its three business sectors: Healthcare, Life Science and Performance Materials.

On October 7, 2019, the Group completed the acquisition of Versum Materials, Inc. a supplier in the electronic materials segment for a purchase price for the acquisition of 100% of the company’s shares of € 5.3 billion. For this reason, the effect of the Versum acquisition will be reported as a portfolio effect in the first three quarters of 2020. Likewise, the acquisition of Intermolecular Inc. closed on September 20, 2019. The purchase price for the acquisition of 100% of the company’s shares was € 56 million. This transaction represents an equity value of approximately US$ 62 million. We do not expect it to have a material portfolio effect.

Forecast for the Group

9.68 KBEXCEL
FORECAST FOR THE Group
€ million Actual results 2019 Forecast for 2020 Key assumptions
Net sales 16,152
  • Solid organic growth
  • Portfolio effect in the mid single-digit percentage range
  • Slightly negative foreign exchange effect of 0% to -3%
  • Organic growth driven by Healthcare and Life Science; Performance Materials with slight organic growth
  • Positive portfolio effect in the mid single-digit percentage range, mainly resulting from the acquisition of Versum Materials
  • Foreign exchange effect due to emerging market currencies and the U.S. dollar
EBITDA pre 4,385
  • Strong organic growth
  • Positive portfolio effect in the mid single-digit percentage range
  • Slightly negative foreign exchange effect of 0% to -3%
  • Strong organic growth in Life Science supported by solid organic growth in Healthcare and Performance Materials with slight organic growth
  • Realization of synergies from the integration of Versum Materials in Performance Materials as planned
  • Foreign exchange effect due to emerging market currencies and the U.S. dollar
Business free cash flow 2,732 Percentage growth in the mid twenties range Rise in EBITDA pre and positive effects from working capital; higher investments in property, plant, and equipment

Net sales

For the Group, in 2020 we expect solid organic net sales growth in comparison with the previous year, driven mainly by our Healthcare and Life Science business sectors. We forecast slight organic growth for Performance Materials. In the first three quarters, the effect of the acquisition of Versum Materials will be reported as a portfolio effect, which we expect to be in the mid-single-digit percentage range. With regard to exchange rate developments, we continue to expect a volatile environment due to political and macroeconomic developments. Overall, we forecast a slightly unfavorable foreign exchange development of 0% to -3% that can be attributed to the currencies of several growth markets, including China, and the development of the U.S. dollar. Our forecast for 2020 is based on an exchange rate of the euro against the U.S. dollar in the range of 1.11 to 1.16.

EBITDA pre

EBITDA pre is our key financial indicator to steer operating business. We forecast strong organic growth for fiscal 2020. This organic growth will be mainly attributable to the Healthcare and Life Science business sectors while also Performance Materials contributes with slight organic growth. The portfolio effect from the acquisition of Versum Materials is expected to be in the mid-single-digit percentage range and will lead to a slight improvement in the margin of the Group.

The expected foreign exchange development is forecast to have a slightly negative effect in the percentage range of between 0% and -3% on Group EBITDA pre; it will be seen particularly in the Performance Materials and Healthcare businesses. The development of the U.S. dollar and of the currencies in several growth markets will have an adverse impact on earnings. These foreign exchange effects will be partly mitigated by currency hedging, although we do not hedge all emerging market currencies.

Business free cash flow

For business free cash flow, we expect growth rates in the mid-twenties percentage range in 2020. The development is attributable to the increase in EBITDA pre, which includes the contribution of Versum Materials, and positive effects from further improved working capital management. Higher investments in property, plant, and equipment will lower business free cash flow.

Forecast for the Healthcare business sector

10 KBEXCEL
FORECAST FOR THE HEALTHCARE BUSINESS SECTOR
€ million Actual results 2019 Forecast for 2020 Key assumptions
Net sales 6,714
  • Solid organic growth
  • Slightly negative foreign exchange effect
  • Stable development of the base business in organic terms
  • Substantial growth contribution by our newly approved products, particularly Mavenclad®
  • Negative foreign exchange effect due to foreign exchange developments in several growth markets and of the U.S. dollar
EBITDA pre 1,922
  • Solid organic growth
  • Moderate negative foreign exchange effect
  • Expected substantial earnings contributions from our new products, especially Mavenclad® , offset negative mix effects associated with the projected decline in Rebif® sales
  • Marketing and selling expenses as well as research and development costs decrease in percent of sales due to systematic cost management and strict pipeline prioritization
  • Negative foreign exchange effect due to foreign exchange developments in several growth markets and of the U.S. dollar
Business free cash flow 1,252 Increase in the low double-digit teens percent range
  • Rise in EBITDA pre
  • Improved management of working capital offsets higher investments in property, plant and equipment

Net sales

For the Healthcare business sector, we expect solid organic sales growth in 2020. We anticipate a stable development of base business, reflecting the continued competitive pressure and the associated decline in Rebif® sales. However, the Rebif® decline will be offset by continued positive growth contributions of products from the General Medicine & Endocrinology and Fertility franchises, largely attributable to growth markets. New regulations in China (volume-based procurement) have a slightly mitigating effect on sales of products from the General Medicine & Endocrinology franchise, in particular. We expect our new products to contribute significantly to organic sales. For 2020, we forecast Mavenclad® and Bavencio® sales to show further substantial increases. Unfavorable foreign exchange developments in several growth markets and with respect to the U.S. dollar are expected to lead to a slightly negative foreign exchange effect.

EBITDA pre

For 2020, we expect EBITDA pre of the Healthcare business sector to see solid organic growth. The negative earnings effects resulting from the projected decline of Rebif® sales and the associated negative product mix effects in the base business should be more than offset by substantial earnings contributions from our new products, particularly Mavenclad®. In addition, we will continue our systematic cost management and strict pipeline prioritization. We therefore expect marketing and selling expenses as well as research and development costs to decline in percent of sales, with research and development costs remaining heavily dependent on the development of clinical data and further expected study results. In 2020, the upfront cash payment from the global strategic alliance with Pfizer for Bavencio® and Xalkori® and milestone payments will no longer be reflected in profit and loss. However, the upfront cash payment in the context of the global strategic alliance with GlaxoSmithKline plc (GSK) for the joint development and marketing of bintrafusp alfa will have a positive effect in the low triple digit Euro millions in fiscal 2020. The exact amount is dependent on the cost evolution and on reaching development milestones and will be recognized in other operating income. The forecast for Healthcare moreover continues to include effects from active portfolio management. But overall, the earnings contribution attributable to these effects will be significantly below the prior-year figure. Furthermore, we expect EBITDA pre to be moderately burdened by foreign exchange effects.

Business free cash flow

In 2020, we expect business free cash flow of the Healthcare business sector to show an increase in the low teens percentage range. The main drivers will be the expected rise in EBITDA pre and improvement of working capital.

Forecast for the Life Science business sector

9.67 KBEXCEL
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
€ million Actual results 2019 Forecast for 2020 Key assumptions
Net sales 6,864
  • Strong organic growth
  • Slightly negative foreign exchange effect
  • All businesses contribute to growth
  • Process Solutions remains the main driver of growth, followed by Applied Solutions
  • Negative foreign exchange effect on account of the U.S. dollar and foreign exchange developments in several growth markets
EBITDA pre 2,129
  • Strong and profitable organic earnings growth
  • Foreign exchange effect slightly negative
  • Organic earnings growth on account of the expected sales growth and slight margin improvement
  • Negative foreign exchange effect due to the trend of exchange rates on several growth markets
Business free cash flow 1,375 Strong increase in the low to mid twenties percentage range
  • Rise in EBITDA pre
  • Improved management of working capital
  • On the other hand, increase in capital spending on strategic projects

Net sales

For the Life Science business sector, we expect strong organic sales growth in 2020 compared to the prior year. All business units are forecast to make a contribution to the positive organic development. The Process Solutions business unit is again likely to remain the strongest driver of organic growth in 2020, followed by Applied Solutions. Moderate growth in the Research Solutions business unit should also contribute to the development of sales. We do not expect the acquisitions of FloDesign Sonics Inc. and BSSN Software GmbH to have a material portfolio effect. Due to the development of currencies in various growth markets and of the U.S. dollar, we project a slightly negative foreign exchange effect.

EBITDA pre

In 2020, the Life Science business sector is expected to show strong organic growth of EBITDA pre compared with the previous year. The persistently dynamic demand trend and a slight margin increase will also contribute to the organic growth in earnings. The foreign exchange impact on earnings in fiscal 2020 could be slightly negative, based on our estimates.

Business free cash flow

We expect business free cash flow of the Life Science business sector to see an increase in the low to mid-twenties percentage range. Higher EBITDA pre and positive effects from the improved management of working capital will be mitigated by higher capital spending on strategic projects .

Forecast for the Performance Materials business sector

9.9 KBEXCEL
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
€ million Actual results 2019 Forecast for 2020 Key assumptions
Net sales 2,574
  • Slight organic growth
  • Portfolio effect in the low to mid thirties percentage range
  • Slightly negative foreign exchange effect
  • Strong growth momentum in the Semiconductor Solutions business unit
  • Continued price decline in Liquid Crystals business, slightly mitigated by a volume increase
  • Slight growth of Surface Solutions
  • Portfolio effects due to Versum Materials in the low to mid thirties percentage range, no material portfolio effect from Intermolecular
  • Negative foreign exchange effect due to the trend of exchange rates on several growth markets and of the U.S. dollar
EBITDA pre 803
  • Slight organic growth
  • Portfolio effects in the low to mid thirties percentage range
  • Slightly negative foreign exchange effect
  • Growth in Semiconductor Solutions can offset price decline in Liquid Crystals supported by active cost management
  • Versum Materials earnings contribution in the low to mid thirties percentage range leads to slight margin improvement
  • Planned realization of synergies of around € 25 million from the integration of Versum Materials
  • Negative foreign exchange effect due to the foreign exchange developments in several growth markets and of the U.S. dollar
Business free cash flow 641 Increase with growth rates in the low thirties percentage range Rise in EBITDA pre including the contribution from Versum Materials, reduced by higher capital investments

Net sales

We forecast a slightly positive organic sales development for the Performance Materials business sector in fiscal 2020. In particular, we expect to see a strong growth dynamic in the Semiconductor Materials. We also anticipate slight organic growth for Surface Solutions compared to the previous year. The Liquid Crystals business will suffer from the continuing price decline due to the price pressure prevailing within the industry. The reduced volume growth versus the prior year will only be able to offset the negative price effects to a limited extent. For Versum Materials, we expect a portfolio effect in the low to mid-thirties percentage range in the first three quarters of 2020. Moreover, the acquisition of Intermolecular closed on September 20, 2019. We do not consider the resulting portfolio effect to be material. Due to the development of the U.S. dollar and of currencies in several growth markets, we expect a slightly negative foreign exchange effect.

EBITDA pre

For the year 2020 we are assuming moderate organic growth of EBITDA pre in the Performance Materials business sector. The price decline in liquid crystals will be offset by anticipated growth in Semiconductor Solutions and by active cost management. We estimate that the portfolio effect of Versum Materials will show total growth in the low to mid-thirties percentage range, which will improve the margin of the business slightly. This forecast includes the planned realization of synergies in the amount of around € 25 million. We expect a slightly negative foreign exchange effect that is attributable to the development of the U.S. dollar and of individual emerging market currencies.

Business free cash flow

For the Performance Materials business sector we forecast a rise in business free cash flow in the low thirties percentage range. The main driver will be the increase in EBITDA pre, essentially owing to the contribution from Versum Materials.

Corporate and Other

We expect Corporate and Other to be below the prior year in fiscal 2020. This is mainly due to a substantially lower burden from foreign currency hedging, which will partly offset opposing foreign exchange effects in the sectors.

Updated forecast for the Group dated May 12, 2020

In the context of the global outbreak of the Covid-19 pandemic, in deviation from our previous forecast we assume a significant burden on global economic growth, which will affect all our businesses, particularly however Healthcare and Performance Materials. Due to the high level of uncertainty with respect to the further development of the Covid-19 pandemic, this outlook is being made with a considerably higher degree of uncertainty than normally. Since the dynamics of the pandemic vary regionally, we are presenting our assumptions in this respect as follows: For China, we assume that the Covid-19 pandemic reached its peak at the end of the first quarter and that a significant easing of the situation will set in as of the second quarter of 2020. For Europe and the United States, we do not expect the pandemic to peak until the second quarter, and currently expect that the outbreak will normalize by the end of the third quarter. Moreover, the current forecast does not assume that a second disease wave will occur in the named regions.

In deviation from the Report on Expected Developments dated February 14, 2020, we now expect a euro-U.S. dollar exchange rate in the range of 1.08 to 1.12. All further forecast assumptions – beyond the Covid-19 implications and the U.S. dollar exchange rate – are identical to those made in our original Report on Expected Developments. Taking into account the present state of knowledge, the forecast previously given is updated as follows:

10.23 KBEXCEL
€ million Net sales EBITDA pre Business free cash flow
Group ~16,800 to 17,800

  • Slight to moderate organic growth
  • Portfolio effect in the mid single-digit percentage range
  • Exchange rate effect -2% to +1%

~4,350 to 4,850

  • Stable organic development
  • Positive portfolio effect in the mid single-digit percentage range
  • Slightly adverse foreign exchange effect of 0% to -3%

~2,650 to 3,250
Healthcare
  • Organic stable
  • Adverse portfolio effect in the mid double-digit million range
  • Neutral to moderately adverse foreign exchange effect
  • Organic slightly negative
  • Slightly to moderately adverse foreign exchange effect
Moderate decline
Life Science
  • Strong organic growth
  • Neutral to slightly adverse foreign exchange effect
  • Strong organic growth
  • Neutral to moderately adverse foreign exchange effect
Increase in the low percentage teens range
Performance Materials
  • Moderate to strong organic decline
  • Portfolio effect in the low to mid-thirties percentage range
  • Slightly positive foreign exchange effect
  • Organic decline in the low to mid-teens percentage range
  • Portfolio effect in the low to mid-thirties percentage range
  • Moderately positive foreign exchange effect
Increase with growth rates in the low twenties percentage range
Corporate and Other -
  • Slightly higher than in 2019
-