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Merck Reports Organic Growth in All Four Businesses in Second Quarter



Published August 15, 2014
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Merck generated organic sales growth of 3.4% in the second quarter of 2014. In addition, the company reported an acquisition-related sales increase of 3.0%, which was countered by negative foreign exchange effects of -4.5%. Overall, sales thus increased moderately by €52 million or 1.9% to €2.8 billion in the second quarter (Q2 2013: €2.7 billion).
 
Despite considerably lower royalty, license and commission income, EBITDA pre one-time items grew to €846 million, equivalent to an EBITDA margin pre one-time items of 30.3% (Q2 2013: 30.1%).
 
“We had a solid second quarter,” said Karl-Ludwig Kley, chairman of the Executive Board of Merck. “This was primarily due to our healthy operating business. Especially in Emerging Markets, all our divisions performed well. Merck’s stronger focus on this attractive region is visibly paying off. The completed acquisition of AZ is also having a positive effect on Group sales and EBITDA pre one-time items.”
 
The operating result (EBIT) of the Merck Group declined by €-24 million to €441 million in the second quarter. This was largely attributable to the higher level of one-time items, especially from acquisitions, lower royalty, license and commission income, as well as negative foreign exchange effects in comparison with the year-ago period.
 
After adjusting for depreciation, amortization and one-time items, EBITDA pre one-time items, the key financial indicator used to steer operating business, grew by 2.3% to €846 million (Q2 2013: €826 million), resulting in an EBITDA margin pre one-time items relative to sales of 30.3% (Q2 2013: 30.1%). Taking into account the 1:2 share split, earnings per share pre one-time items amounted to €1.16 in the second quarter of 2014 (Q2 2013: €1.13).
 
In the second quarter of 2014, net income was €303 million (Q2 2013: €316 million). Acquisition-related one-time items, lower royalty, license and commission income as well as negative foreign exchange effects were responsible for the decline.
 
Business free cash flow of the Merck Group amounted to €632 million in the second quarter (Q2 2013: €784 million), declining by €-152 million or -19.3%.
 
Owing to the payment of the purchase price for AZ among other things, net financial debt increased to €2.2 billion (December 31, 2013: €307 million). At 52.2% (December 31, 2013: 53.2%), the equity ratio remained at a consistently high level.
 
From a regional perspective, dynamic business in Emerging Markets contributed first and foremost to the organic sales growth of the Merck Group. Very strong growth of 11.1% was mainly driven by the Merck Serono and Merck Millipore divisions. Including negative foreign exchange effects of -8.5% and increases of 5.9% from the AZ acquisition, Merck generated sales of €1.0 billion in the Emerging Markets region (Q2 2013: €967 million), equivalent to an increase of 8.5%. The Emerging Market region’s share of Group sales thus grew to 37% in the second quarter (Q2 2013: 35%), exceeding Europe (36%) despite stronger foreign exchange effects.
 
All four divisions of the Merck Group delivered organic sales growth in the second quarter. In particular, Consumer Health generated a good organic sales increase of €15 million, equivalent to a growth rate of 8.5%. Delivering an absolute increase of €44 million (3.0%), Merck Serono made the largest contribution to organic sales growth.
 
In the first six months of 2014, sales of the Merck Group increased by 0.1% to €5.4 billion (January-June 2013: €5.4 billion). Of this amount, 3.6% was attributable to organic growth, 1.5% to acquisitions or divestments, and -5.0% to negative exchange rate effects. All four divisions generated positive organic growth rates in the first six months of 2014. Regionally, Group sales showed the strongest organic growth in the Emerging Markets and Rest of World regions, with growth rates in the first half of 8.4% and 4.0%, respectively. Europe generated slight organic growth of 1.1%, whereas sales in North America slipped organically by -0.5%.
 
In the first half of 2014, the Merck Group reported EBITDA pre one-time items of €1.65 billion (January-June 2013: €1.63 billion). This represented a slight increase over the good half-year result reported in 2013. The EBITDA margin pre one-time items rose by half a percenyage point to 30.6%, indicating a further improvement in Merck’s high profitability vs. the first half of 2013 (January-June 2013: 30.1%). Taking into account the share split, earnings per share pre one-time items for the first half of 2014 increased by 5.9% to €2.32 (January-June 2013: €2.19).
 
In the second quarter, the Merck Serono biopharmaceutical division delivered organic sales growth of 3.0%, to which nearly all the business franchises contributed. Owing to negative exchange rate effects amounting to -4.4%, the division’s sales declined slightly by -1.4% to €1.4 billion (Q2 2013: €1.5 billion). From a regional perspective, Merck Serono performed particularly well in the Emerging Markets, where organic sales grew by 16.7%.
 
“At Merck Serono, we want to further expand our business with existing medicines this year. To this end, we are focusing on Emerging Markets with a high number of underserved patients. The past quarters have already confirmed the success of this approach,” said Kley.
 
In the second quarter, the Consumer Health division, which manufactures and markets over-the-counter pharmaceuticals, generated strong organic sales growth of 8.5%, which was the highest percentage increase of all four divisions. Including adverse exchange rate effects of -5.2%, sales increased by 3.3% to €185 million (Q2 2013: €179 million). In particular, Consumer Health achieved very strong organic growth of 14.2% in the Emerging Markets region.
 
Sales by the Performance Materials division, which comprises Merck’s entire specialty chemicals business, rose in the second quarter by 17.3% to €506 million (Q2 2013: €431 million). This positive development was mainly driven by the acquisition of AZ Electronic Materials, which led to a divisional sales increase of 20.5% or €89 million. Organic growth of 1.8% was achieved thanks to the contributions by the existing Liquid Crystals, Pigments & Cosmetics and Advanced Technologies business units. However, this was canceled out by negative foreign exchange effects of -5.1%.
 
The results of operations were also significantly influenced by the consolidation as of May 2, 2014 of AZ Electronic Materials, which is being managed as an independent business unit during the integration phase. The decline in the operating result (EBIT) as well as EBITDA of Performance Materials by -19.2% to €138 million and by -13.2% to €178 million, respectively, was due among other things to the revaluation of the AZ inventories, which increased cost of sales. EBITDA pre one-time items increased by 8.3% to €226 million. The EBITDA margin pre one-time items decreased to 44.8% (Q2 2013: 48.5%).
 
“The acquisition of AZ Electronic Materials already had a positive effect on EBITDA pre one-time items of both the division and the Merck Group in the second quarter. Priority is now on the rapid integration of AZ, the major aspects of which we want to complete by year-end,” said Kley. “We are glad to have gained the new colleagues from AZ, who will help us to offer customers even more comprehensive solutions.”
 
Despite a challenging market environment characterized by increasing competitive pressure, the Merck Millipore life science tools business generated solid organic sales growth of 4.0% in the second quarter of 2014. However, this was canceled out by negative foreign exchange effects of -4.2%. All business areas contributed to organic growth. The Process Solutions business area, which markets products and services for the pharmaceutical production value chain, among other things, generated organic sales growth of 8.3%, which was the highest rate within the Merck Millipore division.
 
In the second quarter, EBITDA pre one-time items of Merck Millipore climbed 6.3% to €166 million amid unfavorable exchange rate developments. Consequently, the EBITDA margin pre one-time items rose by 1.8 percentage points to 25.2% in the second quarter (Q2 2013: 23.4%). This increase was especially due to the good price and volume development and ongoing cost control.
 
Owing to business performance in the first half of 2014, Merck confirms its forecast for the full year. Merck continues to expect for 2014 slight organic sales growth, which will be canceled out by the aforementioned negative foreign exchange effects. Due to the successful acquisition of AZ Electronic Materials, Merck assumes that sales will increase to around €10.9 – €11.1 billion (2013: €10.7 billion).
 
With respect to EBITDA pre one-time items, organic growth and the planned efficiency increases should be able to offset the effects of the decline in royalty, license and commission income as well as the negative impact of foreign currency. Merck expects EBITDA pre one-time items to grow moderately as a result of the acquisition of AZ Electronic Materials.


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