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Result

Gross profit

The cost of sales in the second quarter rose at a slightly lower rate than sales, increasing by 7.6% to €1,833 million. The main reasons for the increase were higher manufacturing costs, higher raw material prices and, to a lesser extent, higher energy prices, along with negative effects from currency translation. There were also portfolio effects from the recent acquisitions, most notably the Keltan EPDM business. Decreases in the price of the key raw material butadiene at the end of the quarter necessitated write-downs of inventories. In the previous year, effects from the remeasurement of inventories to allocate the purchase price of the Keltan business had an adverse effect.

Gross profit came in at €591 million, which was 9.6% above the prior-year quarter. The gross profit margin improved from 24.0% to 24.4%.

Prices for strategic raw materials, particularly butadiene and isobutylene, and some other important raw materials remained substantially higher than a year ago despite a downward trend toward the end of the quarter. However, we were able to pass these increases along to the market in full in all segments. Thus our price-before-volume strategy remained intact, contributing significantly to the gross profit. While the drop in demand had a negative impact, exchange rates continued to have a positive effect overall. Capacity utilization was below the level of the prior-year quarter because of the demand situation and scheduled maintenance shutdowns.

In the first half, the cost of sales rose in proportion to sales, increasing by 11.5% to €3,629 million. Gross profit came in at €1,183 million, or €122 million above the first half of the previous year, boosted by essentially the same factors as for the second quarter. The gross profit margin therefore came in level with the same period of last year at 24.6%.

EBITDA Pre Exceptionals by Segment
             
€ million Q2 2011 Q2 2012 Change % H1 2011 H1 2012 Change %
             
Performance Polymers 229 257 12.2 428 512 19.6
Advanced Intermediates 65 79 21.5 140 149 6.4
Performance Chemicals 95 78 (17.9) 185 161 (13.0)
Reconciliation (50) (52) (4.0) (92) (91) 1.1
  339 362 6.8 661 731 10.6

EBITDA and EBIT

The operating result before depreciation and amortization (EBITDA) pre exceptionals advanced by €23 million, or 6.8%, to €362 million in the second quarter of 2012 compared to the same period a year ago. This increase was driven mainly by price effects in conjunction with positive currency and portfolio effects. A larger earnings improvement was prevented by the lower volumes and by higher production costs, which were partly due to the increase in energy prices. Selling expenses rose by 4.3% to €195 million, mostly because of currency effects, portfolio effects from the acquisitions made in 2011 and targeted adjustments to sales and logistics structures. A decrease in freight costs in line with the volume development had a positive effect. Research expenditures rose significantly, from €34 million to €53 million, due to the expansion of research activities as part of our LANXESS Technology Initiative, with the Performance Polymers segment accounting for the largest share of the increase. The Group EBITDA margin pre exceptionals was about level with the prior-year quarter (15.1%) at 14.9%.

The Performance Polymers segment raised its second-quarter EBITDA pre exceptionals by a tangible €28 million to €257 million. The persistently high raw material cost inflation compared to the prior-year period was offset by timely price adjustments. Positive currency effects, particularly relating to the U.S. dollar, and a final modest portfolio effect from the acquisition of the Keltan EPDM business offset the effects of the drop in volumes and increase in costs, the latter being partly due to the expansion of research activities.

EBITDA pre exceptionals in our Advanced Intermediates segment surpassed the prior-year quarter’s €65 million and amounted to €79 million. Positive price effects offset the higher raw material costs and the increased energy costs.

EBITDA pre exceptionals for the Performance Chemicals segment receded from €95 million a year ago to €78 million. In this segment, too, higher raw material costs were passed along to the market in full. Earnings were held back by declining volumes, additional expenses for maintenance shutdowns in the majority of business units along with the related decrease in capacity utilization, and by rising production costs. The acquisitions in the Rhein Chemie, Functional Chemicals and Material Protection Products business units yielded modest positive portfolio effects.

EBITDA pre exceptionals for the half-year increased by €70 million to €731 million. Selling expenses moved up by 6.7% to €381 million, chiefly for the same reasons as in the second quarter. Research expenditures rose significantly, from €65 million to €98 million, due to the expansion of research activities. The Group’s EBITDA margin came in at 15.2%, drawing level with the previous year’s 15.3%.

Earnings of the Performance Polymers segment improved tangibly, especially because of price increases and also on account of favorable portfolio and currency effects. EBITDA pre exceptionals rose from €428 million to €512 million. Earnings in Advanced Intermediates advanced from €140 million in the prior-year period to €149 million, mainly in light of price effects. Earnings in the Performance Chemicals segment declined, from €185 million a year ago to €161 million, with positive price and currency effects failing to offset the drop in volumes and the increase in functional costs.

The Group operating result (EBIT) came to €251 million in the second quarter of 2012, down from €255 million in the year-earlier quarter. Higher depreciation charges for newly commissioned facilities had a slightly negative effect on earnings. The exceptional charges included in other operating expenses totaled €20 million, of which €18 million impacted EBITDA. They related mainly to facility consolidations in our Performance Chemicals segment. Exceptional charges in the prior-year quarter came to €5 million, the whole amount of which impacted EBITDA.

For the half-year, LANXESS achieved an improved operating result (EBIT) of €528 million, compared with €501 million the year before. The exceptional charges included in other operating expenses amounted to €24 million, of which €22 million impacted EBITDA. They related partly to the measures already described for the quarter and partly to the planning and implementation of IT projects. The exceptional charges of €10 million in the prior-year period, which fully impacted EBITDA, related primarily to efficiency improvement measures and expenses for corporate transactions.

Financial result

The financial result of minus €23 million for the second quarter of 2012 matched the prior-year period. While interest expense rose due to the growth in financial liabilities compared to the previous year, an increase in the amount of capitalized construction-period borrowing costs had an offsetting effect. Most of these costs related to the major investment project in Singapore. Thus only slightly higher interest expense was recognized than in the prior-year period. Interest income remained largely unchanged. The balance of other financial income and expense was not weighed down by non-recurring expenses, as it was in the same period a year ago. The pro-rated earnings of companies accounted for in the consolidated financial statements using the equity method, mainly Currenta GmbH & Co. OHG, came to €3 million, against €7 million in the previous year.

The financial result for the first half was minus €51 million, against minus €50 million a year ago. The substantial increase in interest expense attributable to higher financial liabilities was offset by a larger amount of capitalized construction-period borrowing costs. In addition, the balance of other financial income and expense was not adversely affected by non-recurring expenses, as was the case in the previous year.

Income before income taxes

Income before income taxes for the second quarter of 2012 came to €228 million, compared with €232 million for the prior-year period. The effective tax rate was 22.4%, against 22.0% for the same period of last year.

Income before income taxes for the first half increased due to the improvement in the operating result, advancing from €451 million to €477 million. The effective tax rate was 22.4%, against 22.8% a year ago.

Net income and earnings per share

Non-controlling interests accounted for €1 million of income in the second quarter of 2012, against zero a year ago. For the half, non-controlling interests accounted for €1 million of income in both 2012 and 2011. Net income for the second quarter amounted to €176 million, compared with €181 million in the prior-year period. Net income for the first half rose from €347 million to €369 million. With the number of LANXESS shares in circulation unchanged, earnings per share dropped slightly from €2.17 to €2.11 for the second quarter but rose from €4.17 to €4.43 for the half.

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