Result

Gross profit

The cost of sales in the second quarter showed a disproportionately large decline of 9.0% compared with sales, to €1,579 million. A particularly important factor here was the decline in raw material purchase prices, which more than offset the opposing effect of higher volumes. Shifts in currency parities had a positive impact. The absence of the substantial write-downs of inventories in the previous year was an additional factor.

Gross profit was €440 million, up by €35 million or 8.6% against the prior-year quarter. The gross profit margin rose from 18.9% to 21.8%. The expansion of volumes and lower manufacturing costs contributed to this positive development, while the decline in selling prices, which outweighed the positive effect of lower raw material costs, had the opposite effect. Shifts in exchange rates had no tangible effect on the gross profit. Capacity utilization was higher than in the prior-year quarter.

In the first half as well, the cost of sales showed a larger decrease than sales, declining by 6.7% to €3,205 million. Gross profit rose by €57 million, or 7.1%, to €857 million. This was the result of higher volumes and lower manufacturing costs, while the adjustment of selling prices more than offset the relief provided by lower raw material costs. The gross profit margin rose accordingly from 18.9% to 21.1%.

EBITDA Pre Exceptionals by Segment
       
€ million Q2 2013 Q2 2014 Change % H1 2013 H1 2014 Change %
       
Performance Polymers 94 122 29.8 206 239 16.0
Advanced Intermediates 74 73 (1.4) 145 145 0.0
Performance Chemicals 67 86 28.4 118 154 30.5
Reconciliation (37) (42) (13.5) (97) (94) 3.1
  198 239 20.7 372 444 19.4

EBITDA and operating result (EBIT)

The operating result before depreciation and amortization (EBITDA) pre exceptionals rose in the second quarter of 2014 by €41 million or 20.7% against the prior-year period, to €239 million. This was mainly attributable to higher volumes and lower manufacturing costs. Earnings were burdened by selling price adjustments, which exceeded the benefit from the decline in raw material costs because of the challenging competitive situation. There were no significant currency or portfolio effects. Selling expenses fell by 6.0% to €188 million. Research and development expenses, at €40 million, were down 7.0% from the prior-year period. General administration expenses amounted to €71 million, compared with €75 million in the second quarter of 2013. The development of functional costs already reflected cost savings from the Advance program. The Group’s EBITDA margin pre exceptionals came in at 11.8%, against 9.2% for the corresponding period of last year.

EBITDA pre exceptionals in our Performance Polymers segment advanced by €28 million, or 29.8%, in the second quarter, to €122 million. This was mainly the result of considerably lower manufacturing costs that resulted in part from lower idle time costs. Earnings were diminished by a drop in selling prices due to lower purchase prices for raw materials. The persistently difficult competitive situation for synthetic rubber also had a negative impact. Further adverse effects resulted from the partly strike-related decline in volumes and from shifting currency parities. Portfolio changes were not a significant factor.

EBITDA pre exceptionals in the Advanced Intermediates segment, at €73 million, was approximately level with the year-ago second-quarter figure of €74 million. Continued good demand for agrochemicals and products from the integrated aromatics network led to positive volume effects. A negative price effect resulted from selling price adjustments, which were driven by lower raw material costs. Earnings were held back by unfavorable shifts in currency parities and a rise in manufacturing costs.

The Performance Chemicals segment generated EBITDA pre exceptionals of €86 million, against €67 million in the prior-year quarter. The increase was largely attributable to higher volumes and positive price effects. In addition, currency and portfolio effects were positive on aggregate.

Group EBITDA pre exceptionals for the first half of 2014 increased by €72 million to €444 million. As in the second quarter, this development was mainly driven by positive volume effects and lower manufacturing costs. Earnings were held back by selling price adjustments, which exceeded the decline in raw material prices. Selling expenses fell by €15 million or 3.9% to €374 million, while research expenditures were down by €6 million to €85 million. The Group’s EBITDA margin pre exceptionals came in at 10.9%, against 8.8% for the first half of last year.

Higher volumes and significantly lower manufacturing costs were the main reasons for the improvement in earnings of the Performance Polymers segment. EBITDA pre exceptionals for the first half climbed from €206 million to €239 million. First-half earnings in the Advanced Intermediates segment were flat with the prior-year period at €145 million. The Performance Chemicals segment raised earnings by €36 million to €154 million, largely thanks to higher volumes and price effects.

The Group operating result (EBIT) amounted to €122 million in the second quarter of 2014, up from €50 million in the year-earlier quarter. Depreciation and amortization, at €99 million, was €17 million or 14.7% below the prior-year period, even after additions from capital expenditures. The reduction in the depreciation and amortization base at the end of 2013 due to impairment charges had an impact here. The exceptional charges included in other operating expenses totaled €19 million, of which €18 million impacted EBITDA. They related mainly to measures associated with the Advance program. Exceptional charges in the prior-year quarter came to €38 million, of which €32 million impacted EBITDA.

In the first half of 2014, LANXESS achieved an operating result (EBIT) of €197 million, compared with €117 million in the prior-year period. Depreciation and amortization came to €202 million, which was €16 million or 7.3% below the first half of last year due to the lower depreciation and amortization base. The exceptional charges included in other operating expenses amounted to €46 million, of which €45 million impacted EBITDA. They related mainly to measures associated with the Advance program and to expenses for the design and implementation of IT projects. The exceptional charges of €43 million in the prior-year period, of which €37 million impacted EBITDA, mainly pertained to measures that later formed part of the Advance program.

Reconciliation of EBITDA Pre Exceptionals to Operating Result (EBIT)
   
€ million Q2 2013 Q2 2014 Change % H1 2013 H1 2014 Change %
       
EBITDA pre exceptionals 198 239 20.7 372 444 19.4
Depreciation and amortization (116) (99) 14.7 (218) (202) 7.3
Exceptional items in EBITDA (32) (18) 43.8 (37) (45) (21.6)
Operating result (EBIT) 50 122 > 100 117 197 68.4
       
    

Financial result

The financial result for the second quarter of 2014 was minus €28 million, compared with minus €39 million for the prior-year period. Interest expense declined by €12 million against the same period of last year. This was mainly due to the repayment of the €500 million Eurobond issued in 2009, which matured in the reporting period. Interest expense was burdened by the capitalization of pro-rata borrowing costs, which partly related to the new plants in Singapore and in China. The amount capitalized was slightly higher than in the prior-year quarter. The earnings contribution from investments accounted for using the equity method came to €4 million in the reporting period, against €0 million in the prior-year quarter.

The financial result for the first half was minus €65 million, against minus €75 million a year ago. This was partly attributable to the improvement in the net interest position and a higher earnings contribution from investments accounted for using the equity method.

Income before income taxes

Second-quarter income before income taxes came in at €94 million, against €11 million for the prior-year period. The effective tax rate was 42.6%, compared with 27.3% for the prior-year quarter.

Income before income taxes for the first half increased from €42 million to €132 million. The effective tax rate was 40.9%, against 23.8% a year ago.

Net income/Earnings per share/Earnings per share pre exceptionals

Net income for the second quarter came to €55 million, compared with €9 million in the prior-year period. First-half net income rose from €34 million to €80 million.

Non-controlling interests accounted for a loss of €1 million in the second quarter, as in the prior-year period. The corresponding figure for the first half of 2014 was minus €2 million, as in the same period of last year.

Earnings per share are calculated by dividing net income by the weighted average number of LANXESS shares in circulation. The number of shares in circulation rose due to the shares issued for the capital increase. The higher number of shares was accounted for pro rata temporis. Earnings per share were €0.63 in the second quarter, well ahead of the €0.11 recorded for the prior-year period. First-half earnings per share rose from €0.41 to €0.93.

Earnings per share pre exceptionals came in at €0.79 and €1.32 in the second quarter and first half of 2014, respectively, compared with €0.42 and €0.76 for the respective prior-year periods. This value was calculated by adjusting earnings per share for exceptional items and the attributable tax effects. Exceptional items in the second quarter came to €19 million, against €38 million in the prior-year period. Exceptional items in the first six months of 2014 amounted to €46 million, against €43 million a year ago.