Q2 2012: Merck Transformation Starts to Yield First Results

  • Merck generates solid sales growth driven by all divisions
  • Especially Merck Serono benefiting from strong underlying trends (Emerging Markets and Fertility)
  • EBITDA pre growth of 14% due to operating leverage, implementation of cost efficiencies and lower discretionary spending
  • Strong free cash flow generation results from higher profitability and improved working capital management
  • Company incurs € 376 million in charges relating to its “Fit for 2018” efficiency program

Darmstadt, August 14, 2012 - Merck’s second-quarter 2012 total revenues rose 12% to € 2,852 million compared to € 2,555 million in the second quarter of 2011. Sales were up 11% to € 2,743 million in second quarter compared to € 2,470 million in the year-ago quarter. This performance reflected organic sales growth of 5.1%, a 5.4% positive benefit from foreign exchange rates and a 0.5% increase from acquisitions and divestments.

Key Figures:
Merck (€ Million)
Q2/2012
Q2/2011
(+/- %)
1-6/2012
1-6/2011
(+/- %)
Total Revenues
2,852.1
2,555.4
11.6
5,497.1
5,119.1
7.4
Sales
2,743.1
2,469.6
11.1
5,307.0
4,947.1
7.3
EBITDA pre one-time items*
746.6
655.2
13.9
1,420.9
1,390.7
2.2
Margin (% of sales)
27.2
26.5
-
26.8
28.1
-
Profit after tax
-60.5
-86.8
-30.2
114.6
254.7
-55.0
EPS pre one-time items** (€)
1.92
1.60
20.0
3.58
3.50
2.3
-
-
-
-
Jun 2012
Dec 2011
(+/- %)
Net financial debt
-
-
-
2,941.9
3,484.4
-15.6

* Earnings before interest, taxes, depreciation, amortization and one-time items
** EPS adjusted by net of tax effect of one-time items and amortization of purchased intangible assets. Reconciliation from reported results available on Merck Investor Relations website

“Merck reported solid second-quarter results due to healthy demand in all our businesses, tight cost management, and favorable currency exchange rates,” said Karl-Ludwig Kley, Chairman of the Executive Board of Merck. “The financials show that we are making good progress in strengthening Merck for the future. Merck Serono performed particularly well, sustaining strong growth trends for a fifth consecutive quarter in Emerging Markets and in its Fertility and Endocrinology businesses.”

Merck reported a second-quarter operating result (EBIT) of € 23 million due to € 394 million in one-time items including impairments, thereof € 376 million in charges relating to the “Fit for 2018” efficiency program. This program aims to bring Merck’s cost structure more in line with competitors and peers. In the second quarter of 2011, the operating result was € -24 million, lowered by material impairments.

EBITDA pre (earnings before interest, taxes, depreciation, amortization and one-time items) rose 14% to € 747 million, or 27.2% of sales, in the second quarter of 2012 from € 655 million, or 26.5% of sales, in the year-ago quarter. This improvement was driven primarily by the operating leverage created by higher sales and a very modest increase in marketing and selling spending (+2%).

Profit after tax was € -61 million in the second quarter of 2012 compared to € -87 million in the second quarter of 2011. On a reported basis, Merck’s earnings per share (EPS) was € -0.29 in the second quarter of 2012 compared to € -0.41 in the year-ago quarter. Adjusted for one-time costs, EPS pre increased 20% to € 1.92 compared to € 1.60 in last year's second quarter.

Merck’s free cash flow (FCF) was € 626 million in the second quarter of 2012 compared to € 253 million in the year-ago period. The strong performance in FCF is a result of higher profitability and improved working capital management.

Merck had 40,085 employees worldwide on June 30, 2012. This was 591 fewer than at the end of 2011.

Merck’s four divisions
Merck Serono’s second-quarter sales increased 11% to € 1,546 million compared to € 1,395 million in the year-ago quarter. This good performance reflected organic sales growth of 6.6% and a 4.2% benefit from foreign exchange rate movements driven by a strengthening US dollar. Organic double-digit sales growth in the regions of North America (21%), Emerging Markets (10%), and Rest of World (15%) more than offset softer trading conditions in Europe, where sales declined for the fourth consecutive quarter (-2.4%), impacted by continued pricing pressures. The division’s Fertility and Endocrinology businesses also continued their robust performances, with sales growing at a double-digit rate, driven by higher volumes and pricing gains.

Global sales of Merck’s largest single product, Rebif® for the treatment of relapsing forms of multiple sclerosis (MS), rose 9.6% organically to € 492 million in the second quarter. Sales of the targeted cancer treatment Erbitux® increased 7.1% on an organic basis to € 226 million in the second quarter of 2012.

The division’s EBITDA pre rose at a faster rate than sales, improving by 20% to € 439 million, or 28.4% of sales, in the second quarter of 2012 compared to € 366 million, or 26.3% of sales, in the year-ago quarter.

The Consumer Health division reported second-quarter sales of € 121 million, an increase of 2.9% from € 118 million in the year-ago quarter. This performance reflected organic sales growth of 1.0% and a 2.0% boost from positive foreign exchange rate movements. These increases were driven primarily by the Emerging Markets, which more than offset softer sales in Europe. The division’s EBITDA pre for the second quarter of 2012 improved markedly to € 18 million, or 14.7% of sales, compared to € 13 million, or 11.0% of sales, in the second quarter of 2011. This was primarily due to improved resource allocation and cost efficiencies.

In the context of the "Fit for 2018" efficiency program currently underway throughout the Merck Group, the Consumer Health division will incur an estimated € 40 million in restructuring costs during 2012 and 2013. Net savings from the restructuring should amount to about € 5 million this year, € 15 million in 2013 and € 25 million annually thereafter.

The Performance Materials division sales jumped 14% to € 426 million in the second quarter of 2012 from € 373 million in the year-ago quarter. This reflects a 3.9% organic sales increase and a 10.2% boost from foreign exchange rates due to the stronger US dollar. The Liquid Crystals business benefited from continued strong consumer demand for larger televisions. Sales by the Pigments & Cosmetics business unit continued to decline organically due to a weakened economic environment in Europe.

The division’s EBITDA pre for the second quarter of 2012 was € 190 million, or 44.5% of sales, an increase of 5.7% from the € 179 million, or 48.0% of sales, in the second quarter of 2011. The decrease in EBITDA pre margin was driven by an unfavorable change in product mix and lower pricing.

The Merck Millipore is continuing successfully on its path to deliver profitable growth. The division’s second quarter 2012 sales rose 11% to € 649 million compared to € 583 million in the year-ago period, reflecting organic growth of 3.2%, a 6.0% benefit from positive currency exchange rates and a 2.2% boost from acquisitions. All three business units contributed to the organic sales growth, especially Lab Solutions and Process Solutions. Geographically, Emerging Markets was the growth driver for the organic sales increase.

Merck Millipore’s EBITDA pre for the second quarter of 2012 improved by 15% to € 148 million, or 22.8% of sales, compared to € 129 million, or 22.1% of sales, in the year-ago quarter. The higher margin was due to a marked improvement in the division’s gross margin.

Merck Guidance for 2012
Based on the second-quarter results, Merck has upgraded its full-year total revenues and EBITDA pre guidance for 2012. The company expects markets for innovative biopharmaceuticals and over-the-counter preparations to grow, driven by volume growth in the Emerging Markets. The Liquid Crystals business unit expects continued strong volumes in this year’s third quarter and a softening of sales in the fourth quarter. Finally, the company continues to see solid demand for life science products as well as volume growth in biologic-based pharmaceuticals.

Based on these assumptions, Merck expects the following financial performance for 2012:


Merck
2012 Expectations
Total revenues
~ € 10.7 bn
EBITDA pre *
€ 2.85 bn – € 2.95 bn

* Includes € 55 million in savings from the efficiency program.


Merck Divisions
2012 EBITDA pre Expectations
Merck Serono
€ 1,750 m – € 1,800 m
Consumer Health
€ 60 m – € 65 m
Performance Materials
€ 660 m – € 680 m
Merck Millipore
€ 580 m – € 600 m
Corporate and Other
€ -200 m


Notes to Editors:
The complete interactive online version of the Q2-2012 Report, as well as the related presentations, is available at: Merck Q2-2012-E

Merck KGaA stock symbols:
Reuters: MRCG, Bloomberg: MRK GY, Dow Jones: MRK.DE
Frankfurt Stock Exchange: ISIN: DE 000 659 9905 - WKN: 659 990

Note regarding forward-looking statements
The information in this document contains “forward-looking statements.” Forward-looking statements may be identified by words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “will” or words of similar meaning and include, but are not limited to, statements about the expected future outcome or timing of the transactions described above. These statements are based on the current expectations of management of Merck KGaA and E. Merck KG, and are inherently subject to uncertainties and changes in circumstances. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are factors relating to changes in global, political, economic, business, competitive, market and regulatory forces. Merck KGaA and E. Merck KG do not undertake any obligation to update the forward-looking statements to reflect actual results, or any change in events, conditions, assumptions or other factors.

Posted: August 2012


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