Segment Information

• Performance Polymers: robust margins in difficult times
• Advanced Intermediates: volume erosion compensated by flexible cost management and acquisitions
• Performance Chemicals: solid results in the crisis
  
  

Due to the global economic crisis, the Performance Polymers segment saw a steep decline in sales during 2009, which was mitigated to some extent by the onset of a recovery in demand in the second half-year. Sales decreased by 27.2% over the year as a whole. These lower revenues were due mainly to the downward pressure of 19.9% exerted on selling prices by a substantial drop in raw material costs. Volumes retreated by 11.3% year on year. Demand nevertheless rebounded in the second half of the year, halting the downward momentum seen in the first six months. A slight compensatory effect was generated by positive currency and portfolio effects of around 2% each that were attributable to the acquisition of the Petroflex group in 2008.

All of the segment’s business units saw substantial falls in selling prices compared with the previous year. However, these were mitigated by lower costs for raw materials and energies. Selling prices in the segment moved upwards again in the second half of the year. Volumes also retreated in all business units in 2009. The segment saw demand decline considerably in nearly all regions. Only Asia-Pacific, especially China, was able to clearly escape the trend seen in other sales markets.

EBITDA pre exceptionals of the Performance Polymers segment fell sharply by 39.5% from €413 million to €250 million due to price and volume factors. In spite of the exceedingly difficult environment, this segment’s EBITDA margin remained in double digits at 10.5%, down from 12.6% in the previous year. Price reductions were offset by lower raw material and energy costs as well as by savings attributable to the Challenge09-12 program of measures. Business units such as Butyl Rubber and Performance Butadiene Rubbers, which have a strong association with the tire industry, bore the brunt of these price cuts. The Semi-Crystalline Products business unit lifted EBITDA pre exceptionals in this segment, benefiting in particular from its highly integrated production network and competitive cost structures. The efficiency enhancements resulting from flexible asset and cost management in conjunction with the Challenge09-12 program cushioned the drop in earnings in all of the segment’s business units. Capacity utilization improved perceptibly at the end of fiscal 2009, due to increased demand for replacement and winter tires, among other things. Raw material prices rallied at the same time. The stronger U.S. dollar compared with the previous year also created a positive currency effect in the year under review.

Exceptional charges of €9 million were incurred in fiscal 2009, €8 million of which affected EBITDA. These related mainly to costs for personnel adjustments under the Challenge09-12 program and to secondary costs for the efficiency enhancement programs initiated in early 2008 at the sites in Canada, Brazil and Belgium.

Sales in the Advanced Intermediates segment receded €206 million, or 15.7%, to €1,104 million in 2009. The principal reason for this drop in sales was a 12.4% decline in volumes coupled with a 5.9% reduction in selling prices. Positive currency changes of 1.3% had a slight offsetting effect. The first-time consolidation of the businesses of Gwalior Chemical Industries Ltd. in India and Jiangsu Polyols Chemical Co. Ltd. in China, both of which were acquired in the third quarter of 2009, also resulted in a portfolio effect of 1.3%.

Business with agrochemicals remained relatively stable throughout the year and greatly supported segment revenue. The increase in demand for precursors for fungicides was a major contributory factor. Sales of pharmaceutical precursors moved back slightly, as did business with the automotive and related industries. The drop in raw material costs necessitated price reductions in the Basic Chemicals business unit under existing supply agreements. The fourth quarter of 2009 was dominated by the usual seasonality. In the agricultural business in particular, volumes were down on account of higher stocks held by customers.

EBITDA pre exceptionals of the Advanced Intermediates segment fell by €32 million to €154 million, a decrease of 17.2%, chiefly due to declining volumes prompted by sluggish demand. Price reductions at segment level were offset by lower raw material costs and savings attributable to the Challenge09-12 program. Segment earnings were buoyed by shifts in currency parities and the successful completion of the acquisitions in Asia, which brought the EBITDA margin up to 13.9%, close to the prior-year figure of 14.2%.

The segment’s exceptional items of €11 million in fiscal 2009, all of which affected EBITDA, mainly related to costs incurred in connection with the Challenge09-12 program.

Sales in the Performance Chemicals segment declined 20.7% in fiscal 2009 from €1,930 million to €1,530 million. After adjusting for positive currency effects of 1.8%, operational sales fell by 22.5%, due almost entirely (minus 21.3%) to lower sales volumes. Prices remained almost stable, declining by just 1.2%. None of the segment’s business units was able to escape the year-on-year volume shrinkage. Business units that generate the bulk of their revenues with customers from the automotive and related industries were generally the hardest hit. These include the Rhein Chemie and Rubber Chemicals business units, both of which saw volumes decrease significantly in the year under review. In the Inorganic Pigments business unit, demand declined in the EMEA region in particular. However, this business unit succeeded in passing price increases on to the market in line with the “price before volume” strategy. The lowest sales decreases were reported in the Material Protection Products business unit. Declining volumes of wood protection products were partially offset by price increases and positive currency effects. In the Leather business unit, demand for leather chemicals dropped markedly, particularly in the first six months of the year. Although prices remained stable, segment volumes were down at year-end owing to seasonal fluctuations, especially because of weaker demand for biocidal agents and from the construction industry due to the hard winter.

EBITDA pre exceptionals of the Performance Chemicals segment fell back by a substantial 24.5%, from €241 million to €182 million. While lower raw material costs and a positive currency effect more than offset the price erosion, the volume losses significantly dampened EBITDA pre exceptionals. However, these effects were effectively countered by systematic reductions in manufacturing costs and the lower administrative and selling costs achieved by means of flexible asset and cost management in conjunction with the Challenge09-12 program. As a result, the EBITDA margin almost doubled year on year in the fourth quarter of 2009 although demand remained at a similar level. Segment earnings benefited mainly from activities in the Inorganic Pigments, Leather and Material Protection Products business units in particular, the latter being one of the few units able to lift EBITDA pre exceptionals in the year under review. The segment’s EBITDA margin pre exceptionals of 11.9% fell slightly short of the 12.5% achieved in the previous year, due for the most part to the negative volume trends.

The segment’s exceptional items of €17 million, €11 million of which affected EBITDA, included expenses in connection with the Challenge09-12 program of measures and, in particular, restructuring expenses in the Functional Chemicals business unit. This unit’s colorants production at the site in Lerma, Mexico, will be transferred to existing facilities in Leverkusen, Germany. This will increase the competitiveness of the business unit’s German production facilities as part of the global optimization of production structures.

The exceptional charges of €18 million in fiscal 2009 reported in the Reconciliation table, of which €13 million impacted EBITDA, primarily related to expenses for restructuring activities and portfolio adjustments. Such expenses mainly included personnel adjustment costs, expenses for the closure or partial closure of facilities, and costs for the preparation and execution of corporate transactions, to the extent that these expenses and income cannot be allocated accurately to the segments or business units.