A Deep Dive into Merck s LC & OLED Business

Transcription

1 A Deep Dive into Merck s LC & OLED Business Merck Information Day 2013 The webcast will start at 10:00 am CET. Darmstadt, Germany June 26, 2013

2 Agenda PRESENTATIONS PART I 10:00 a.m. 10:25 a.m. 10:25 a.m. 10:50 a.m. 10:50 a.m. 11:40 a.m. Dr. Bernd Reckmann Member of the Executive Board Performance Materials & Merck Millipore Walter Galinat President of Performance Materials Dr. Michael Heckmeier Senior Vice President LC Research & Development Leadership built on unique strengths Characteristics of the liquid crystals market Shaping the future of liquid crystals 11:40 a.m. 12:15 p.m. All Q&A Session EXHIBITION & LUNCH BREAK 12:15 p.m. 1:15 p.m. PLANT TOUR 1:15 p.m. 2:30 p.m. PRESENTATIONS PART II 02:30 p.m. 02:55 p.m. 02:55 p.m. 03:15 p.m. 03:15 p.m. 03:30 p.m. Udo Heider Vice President OLED Dr. Thomas Kietzke Director Strategy and Market Intelligence Matthias Zachert Chief Financial Officer OLED Status quo and Merck s position LCDs a high hurdle for new large display technologies Liquid Crystals sustained value contribution 03:30 p.m. 04:00 p.m. All Q&A Session

3 Disclaimer Remarks All comparative figures relate to the corresponding last year s period. Important information This presentation does not constitute an offer of securities for sale or a solicitation of an offer to purchase securities in the United States. The shares referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act ), and may not be offered or sold in the United States absent registration under the Securities Act or an available exemption from such registration. Note regarding forward-looking statements The information in this document may contain 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 business of Merck KGaA resulting from the proposed transaction. 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 satisfaction of the conditions to the proposed transaction, and 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 content of this presentation and forward-looking statements to reflect actual results, or any change in events, conditions, assumptions or other factors. All trademarks mentioned in the presentation are legally protected.

4 Leadership built on unique strengths Merck Information Day 2013 A Deep Dive into Merck s LC&OLED Business Dr. Bernd Reckmann Member of the Executive Board - Performance Materials & Merck Millipore Darmstadt, Germany June 26, 2013

5 Liquid crystals are the largest part and key driver of Performance Materials Liquid Crystals Pigments and Cosmetics ~ 1.7 bn sales Portfolio >70% <30% Portfolio Liquid Crystals for displays High-value Pigments OLED materials for displays and lighting Decorative applications Phosphors for LED Functional applications

6 Liquid crystals are a mixture made of several singles and a critical display component Liquid Crystals Liquid crystal value chain Single Mixture Display Portfolio Liquid Crystals for displays OLED materials for displays and lighting Phosphors for LED Proprietary organic molecules and mixture know-how Each electronic product needs its custom-made mixture Joint development of Merck and customers

7 Liquid Crystals stand apart from typical players in the chemical industry Bulk chemicals Companies Volumes kt Players like BASF **, Bayer Materials Science, Dow 10-15% Margins * Specialty chemicals Companies Companies like DSM, Evonik, Volumes AkzoNobel, DuPont t 15-20% Margins * High value added chemicals Companies Specialty chemicals firms like Volumes Symrise, Givaudan, Croda kg 20-30% Margins * Companies bn business with small volumes at high value per gram and decisive function for customer Volumes g Margins * Premium Chemical activities of Merck are the exact opposite of bulk * On EBITDA ** BASF without Oil and Gas

8 Merck customers, panel and set makers alike, are based in Asia Relative production capacities * of customers by region Japan South Korea Main customers Innolux AU Optronics Samsung Display LG Display Taiwan China BOE CSOT Sharp SDP ** * DisplaySearch 2013 ** Sakai Display Products

9 Merck is THE innovation leader in the highly consolidated liquid crystals market Market share of liquid crystal suppliers * Characteristics No LC market shares No.2 No.3 Merck is pioneer and market leader since the beginning of liquid crystals commercialization Proven innovation track record Customers come to Merck as the enabler for new product development and existing technology improvements Oligopolistic market structure with high barriers to entry Sustained market leadership in liquid crystals * Merck research

10 The liquid crystals market boasts high barriers to entry with sophisticated requirements Continuous innovation Increasingly shorter life cycles in consumer electronics require continuous innovation Customers constantly need and expect new formulations to differentiate against competitors Patent protection Know-how and intellectual property driven market Patents determine competitive advantages like product quality and exclusivity Customer intimacy Suppliers need customers trust to identify future innovation needs and potentials Products customized to fit clients specific requirements Application and production know-how Ultra-high quality standards: one part in a billion impurity can lead to display defects Modern, highly efficient and flexible production technologies required

11 Merck: Enabler of ALL key display technologies in the last decades Continuous innovation Merck innovation leader Other new techs Discovery Commercialization PS-VA Discovery Commercialization Patent protection VA Discovery Commercialization Customer intimacy TN-TFT IPS Commercialization Commercialization Application and production know-how time Merck the innovation leader approached as solution-provider by customers on a regular basis

12 Merck: Leadership in liquid crystals IP Continuous innovation Patent protection Patent strength More than 100 new liquid crystals patents every year Patent strength Proactive patent management enforcing Merck s IP rights Customer intimacy Patent strength Portfolio of ~2,500 liquid crystals and applications patents Patent strength Broadest spectrum of intellectual property Application and production know-how Strong intellectual property position

13 Merck is the only player with complete geographic coverage of its customers Continuous innovation Europe Asia Sharp SDP Merck presence Patent protection Samsung LG Display Merck presence Customer intimacy Application and production know-how Merck Single production Innolux Merck customer proximity - at the front door of each key customer BOE CSOT Merck presence AUO Merck presence

14 Merck runs premium multi-purpose production facilities including largest plant globally Continuous innovation Patent protection Customer intimacy Application and production know-how Multi-purpose and multi-product small to large-scale production facilities for liquid crystals, active pharmaceutical ingredients and specialties Production cost leadership by high flexibility of production assets Applied technology leadership, e.g. micro-reaction technology in industrial scale for process intensification and improved sustainability Advanced capability to develop and perform highly complex multi-step organic synthesis with minimum time-to-market Best in class for quality and reliability in customer application Leading in expertise and scale

15 Merck fulfills all requirements for sustained leadership in a sophisticated market Continuous innovation Patent protection Customer intimacy Application and production know-how

16 Chemical molecules tend to find their applications evolution and expansion of a new market CRT replacement era Device innovation The future of display Display market Flat panels more attractive than old-fashioned CRT monitors and TVs Creation of new distinct device classes using liquid crystals for displays Transparent, flexible, holographic and part of walls / windows Highly dynamic display market; pace accelerating > 2010 > 2015 Smart windows Convergence of lighting and display Closely tied to consumer- and lifestyle-driven end market Driven by innovation and new applications Enabler for devices that capture megatrends urbanization and communication Notebooks, Monitors, TVs Tablets and 3D TV Smart TVs & Phones ebook readers Transparent Flexible Holographic Display market is innovationdriven and constantly evolving

17 Displays with new features will drive market growth and extend the current range of display types Projected development of the flat panel display market by display type Display development [$ bn] The display market is expected to triple from 2010 to 2030 Flexibility and transparency will be key trends in display development Non-flexible displays - strength of LCD - are likely the dominating display format Flexible displays - strength of OLED - will be smaller portion of market Source: Transparent Display Technology and Market Forecast, Displaybank, Apr. 2011

18 Current trends and customer needs continue to drive growth and innovation 3D TVs Trend Special display materials for cinema-type 3D experience Replacement of older TVs Impact on Merck Liquid crystal volumes Reactive mesogens Display resolution (4K2K/UHD) Larger displays need higher amounts of liquid crystals, from <40 to 80 to 110 PS-VA for high-transmission liquid crystals Liquid crystal volumes Especially PS-VA Tablets, smartphones Strong end-consumer demand for new devices accelerating the replacement cycle Liquid crystal volumes LCs for high resolution Smart TVs Replacement of older TV sets with internet connected devices offering more services and better human interfacing Liquid crystal volumes

19 The next innovation step applications beyond displays Transparency Invisible when off Holography Complete spatial immersion Intelligent light guiding Seamless light adjustment, saving energy Smart window Mechanical-free light direction Robustness Light-weight and indestructible Smart antenna Active antennas for high- speed data streams Picture source: Sign Kommunikation GmbH

20 Liquid crystal-based smart window: A unique way to realize energy efficiency and aesthetic facades Smart windows The idea Window normal state Window set to dark Unique autonomous switchable window based on liquid crystals and dyes Fast switching capabilities from bright to dark Color tunable Increasing demand for energy saving through light control Creation of a large area application using high quality liquid crystals Illustration

21 Merck leadership in Liquid Crystals is built on unique strengths Market position Leading market position in attractive high-margin market Future potential Consumer needs and consumer trends drive future demand Innovation Merck has a proven track record of innovation and commercialization Pipeline Broad and full pipeline of future technologies and applications

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23 Characteristics of the liquid crystals market Merck Information Day 2013 A Deep Dive into Merck s LC&OLED Business Walter Galinat President of Performance Materials Darmstadt, Germany June 26, 2013

24 Agenda Basics of liquid crystals and the display industry Market, customers and competitors Key products Supply chain Conclusion

25 Basic setup of a liquid crystal display Liquid crystal panel structure Business drivers Polarizer Glass substrate ITO film Liquid crystal Unpolarized white light TFT Orientation film Backlight (LED) as white light source Liquid crystals layer modulates light intensity by changing molecular orientation under applied voltage Color created by color filters ITO film Glass substrate Polarizer Orientation film Color filter Liquid crystals enable revolutionary developments in the business environment and consumer electronics Acronyms: TFT = Thin-Film Transistor; ITO = Indium Tin Oxide; LED = Light-Emitting Diode

26 Liquid crystals: The decisive element of a display but with low share of module cost Cost structure of a liquid crystal display Business drivers Chemical Glass and Color-filter Printed circuit board 3 Polarizer Driver liquid crystal Others ~2-3% Liquid crystals Liquid crystals determine device performance Contrast Viewing angle Response time Transmission (energy use) Reliability Labor Backlight Liquid crystals make up only ~2-3% of panel costs but are most critical performance component Source: DS Cost Report Q (40 FHD 120Hz TV Module)

27 Agenda Basics of liquid crystals and the display industry Market, customers and competitors Key products Supply chain Conclusion

28 TV displays dominate the liquid crystals market and are its most prominent growth driver LCD area demand by application, display area [km 2 ] Business Drivers Competitors Customers Market 179km 2 141km 2 113km E 2017E Desktop Monitor Mobile PC Others LCD TV 64% 10% 14% 12% Growth dominated by TVs Home cinema: increase of TV sizes TV display surface expected to grow visibly over next years LCD area determines liquid crystal growth CRT 1 replacement by liquid crystal displays TVs are the dominant demand driver for liquid crystals Source: DisplaySearch Q1 13; 1 Cathode ray tube; Others include: mobile phones, public displays, car navigation and others

29 TV size increase leads to overproportionate demand increase for liquid crystals Increasing area requires more LC material Average TV size in inch Competitors Customers Market 36 : current average diameter 36 diameter Trend toward bigger TV sizes drives liquid crystal demand + 1 inch = 6% more liquid crystals % CAGR E

30 TV replacement cycles are getting shorter, driving liquid crystals demand Average TV replacement cycles Competitors Customers Market [years] US UK China-Rural China-Urban Age of TVs replaced in 2011 Age of TVs replaced in 2012E Source: DisplaySearch 2012

31 The liquid crystal market is attractive despite its potential volatility Market volatility Competitors Customers Market Multi-step supply chain from Merck to the consumer Downstream inventories driven by seasonal as well as one-time events and revolutions in technology Seasonal events: Christmas, Chinese New Year Examples of one-time events: Olympics, World Soccer events, etc. Market attractiveness Innovation-driven High margins Fast moving Solid underlying growth trends Highly concentrated Constantly new applications Attractive growing market with volatility but underlying strength

32 Merck customers: All have strong capabilities in liquid crystal displays Competitors Customers Market Panel makers Sakai Display Products Small- / mediumsize panels Large size panels All customers are based in Asia Local Focus Global LCD panel market entry Source: Merck research

33 Merck - The only player with complete geographic customer coverage Production and R&D centers in Asia Key success factors Competitors Customers Market Merck, Korea Merck, China Sakai Display Products Customer proximity: A successful differentiator Merck, Japan Merck, Taiwan Single production in Darmstadt Merck only player with production in all four customer countries Development of tailor-made mixtures according to customer specifications Fast response time Close cooperation with leading universities Local R&D and fast track development of marketable solutions based on worldwide network

34 Merck - THE innovation leader with broadest competitive platform Merck and competitors Competitors Customers Market Technologies TN IPS VA PS-VA some activity some activity New techs Position No.1 No.3 Market Share ~ 60% No.2 ~ 30% ~ 10% Merck leading in all aspects of liquid crystals R&D center China Korea Taiwan Japan Conglomerate advantage

35 Agenda Basics of liquid crystals and the display industry Market, customers and competitors Key products Supply chain Conclusion

36 Continued delivery of new innovations generating additional sales Volume Merck volume development per technology New liquid crystal materials PS-VA (various generations) IPS/VA/FFS TN-TFT Liquid crystal technologies Specific features of liquid crystals as enablers for new display applications Within technologies emergence of various distinct generations, e.g. PS-VA Novel liquid crystal materials SA-VA and Blue Phase currently in R&D LC innovation cycles are getting shorter Illustration

37 Strong R&D investment fosters innovation stream and product portfolio Portfolio of various liquid crystal materials [% of sales] Product portfolio expansion Introduced in 2012 Introduced in 2011 Introduced in 2010 ~74% < 3 years Ongoing innovation drives continuous portfolio expansion Typical age of liquid crystal mixtures only two to three years Additional sales generation through new liquid crystal materials and technologies Introduced before 2009 High R&D: ~10% of sales p.a. to safeguard ongoing innovation

38 Merck s deep know-how creates high entry barriers for potential competitors New classes of liquid crystals enable revolutionary display and performance Merck s liquid crystal single material Merck: Customized liquid crystal mixtures Translate chemistry into physics Tons of raw materials used in multistep chemical syntheses to produce > 300 singles Ultra pure organic chemistry High quality standard of single substance Leveraging our expertise in mixture recipes Approximately 10,000 mixtures per year We design the exact liquid crystal that our customers need

39 Agenda Basics of liquid crystals and the display industry Market, customers and competitors Key products Supply chain Conclusion

40 Special expertise in single and mixture development crucial for market success Darmstadt/Germany Asia/China, Japan, Korea, Taiwan Process details Single A Single B > 300 liquid Single 3 crystals singles Development of ~10,000 liquid crystal mixtures every year vvv Display production Display production Display production > 200 m LCD TVs sold in 2012 Up to 25 singles make up a liquid crystal mixture Merck customizes liquid crystal mixtures for each new product line-up Singles and mixtures determine product features Reliability Viewing angle Contrast Response time Single Z Transmission (energy consumption)

41 State-of-the-art multi-purpose production facilities with world s largest factory for liquid crystals Portfolio of >300 singles Based on complex organic synthesis with up to 12 synthesis steps Unique production Flexible manufacturing of a complex product portfolio Strong R&D Strong R&D and production expertise enable fast product launches Cost advantages through technology Micro-reaction technology In-house development of highly specific catalysts Merck continues to invest in advanced process technologies

42 Innovation as key driver for profitability Market dynamics Merck innovation awards Innovation New liquid crystal mixtures launched continuously Pricing pressure Competition in existing technologies SID * Award 2009 and German Future Prize 2003 Process improvement Declining liquid crystal panel prices Merck with proven track record in last decade of successfully overcoming pricing pressure through innovation Innovation Award 1999 * SID: Society for Information Display

43 Long-term panel demand increases while hard to predict inventories cause sales fluctuations Liquid Crystals sales Weeks of inventory Quarterly weeks of inventory delta at panel / set makers over last two years * 3 Excess 2 Balanced 1 0 Tightness -1 Quarterly Merck Liquid Crystals sales Comments High supply chain inventory levels will lead to decreasing liquid crystal orders in forthcoming quarters Inventory levels difficult to predict, as various factors influence consumer, wholesaler and manufacturer behavior Liquid crystal sales have always seen fluctuations while the underlying business remained healthy * Source: GfK; April 2013

44 Agenda Basics of liquid crystals and the display industry Market, customers and competitors Key products Supply chain Conclusion

45 Merck has the most competitive platform in a dynamic liquid crystals market Innovation leader with unique skill set and R&D centers in all customer countries Panel makers need best-in-class supplier to build best-in-class displays Underlying solid LCD TV market growth subject to occasional volatility High margin technologies dominating sales split

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47 Shaping the future of liquid crystals Merck Information Day 2013 A Deep Dive into Merck s LC&OLED Business Dr. Michael Heckmeier Senior Vice President LC Research & Development Darmstadt, Germany June 26, 2013

48 Agenda The Merck R&D engine in display materials Drivers of liquid crystal display development The role of liquid crystals in display development Liquid crystals beyond flat panel displays Summary

49 Merck has a strong R&D platform for display materials A strong platform for R&D leadership in display materials Strong organizational setup Broad focus and know-how Global reach ~500 people in R&D Highest number of research facilities and laboratories Powerful budget of more than ~ 100 m Broad R&D approach across the display value chain State-of-the-art application know-how Broadest range of display materials Research centers in key innovation regions Development hubs close to customers Fast-moving market Short innovation cycles R&D leadership is key in display market High versatility of displays creates opportunity for new applications Display manufacturers seeking differentiation

50 For this reason, we were first to introduce new liquid crystal technologies for large displays IPS Improved picture quality Commercialization 1996 VA Large TVs Commercialization 2000 Commercialization PS-VA Display cost reduction & advanced performance 2008 Merck Innovation leader

51 Merck continuously broadened its position to become a provider of commercial display solutions Value contribution 10 years ago today Details Portfolio of singles OLED < 200 singles > 300 singles Largest portfolio of singles Reactive Mesogens OLED OLED x OLED Broad portfolio of reactive mesogens OLED OLED x OLED OLED Leading player OLED in OLED Phosphors OLED x OLED OLED Innovations in phosphors to improve efficiency and color gamut of LED backlight Merck: material supplier Merck: provider of display solutions Merck evolved from material supplier into a provider of value-added display solutions

52 Agenda The Merck R&D engine in display materials Drivers of liquid crystal display development The role of liquid crystals in display development Liquid crystals beyond flat panel displays Summary

53 Viewing experience, production costs and changing display technologies are key development trends Drivers Resolution (4K2K) Color gamut Additional features (3D, transparent, gesture control) Evolution in display technology Drivers Liquid crystals Reactive mesogens OLED Improved viewing experience Lower manufacturing costs Drivers Higher light transmission Lower display complexity Manufacturing processes

54 LCD viewing experience has tremendously improved over the past years Display response time Display diameter 15 ms 1 ms Key driver Fast-switching liquid crystal materials 110 Key driver LC materials of the IPS and VA families <1 ms >2015 ~ Display thickness Contrast ratio >50 cm Key driver Key driver 15 cm LCD 0.8 cm LED backlighting 1:1,000 1:10,000 LC materials with higher light transmission Reactive mesogens CRT Company view

55 Despite the revolutionary progress in flat-panel displays, there is still much more to innovate (1/2) Picture quality Size Thickness Focus areas Contrast ratio Resolution, e. g. 4K2K Color gamut Switching time New liquid crystal modes, e. g. FFS Focus areas Jumbo TVs > 120 inches Consumers buy larger screens Liquid crystals only technology to scale size cost-efficiently Higher resolution like 4K2K Focus areas Tablets Liquid crystal mixtures for LED backlit displays Phosphors for LED backlighting

56 Despite the revolutionary progress in flat-panel displays, there is still much more to innovate (2/2) Reduction of manufacturing costs New features Energy efficiency Focus areas Fewer display components Higher light transmission of liquid crystals Shorter processing time of displays Focus areas 3D without glasses Flexible/unbreakable displays Internet connectivity Transparent displays New controls (gesture, swiping remote) Focus areas Higher light transmission of liquid crystals Backlighting with higher efficiency

57 Agenda The Merck R&D engine in display materials Drivers of liquid crystal display development The role of liquid crystals in display development Liquid crystals beyond flat panel displays Summary

58 Merck innovates to contribute to both overall display cost reduction and display performance Liquid crystal cost reduction potential in LCD Others Backlight Printed circuit board Driver LC Polarizer Chemical Influenced by liquid crystals costs ~2-3% Liquid crystals Glass + color filter Printed circuit board Labor Backlight Driver LC Glass + color filter Potential of lowering costs through liquid crystals Liquid crystals contribute little to overall display costs, but can lower cost of various other display components Source: DS Cost Report Q (40 FHD 120 Hz TV module)

59 Merck is active in both fundamental research and continuous technology improvements New liquid crystal technology launches Revolutionary innovations Fundamental research needed! Potential to significantly improve display characteristics and production costs Typically enlarge existing liquid crystal portfolio rather than replacing it Usually require adaptations/investments in display production process Incremental innovations Evolutionary innovations Potential to gradually improve display characteristics and production costs No changes/investments in display production process needed

60 Innovation and differentiation in existing as well as in new liquid crystal technologies Potential new LC technologies Commercialized LC technologies Incremental innovation New LC technology launch Blue Phase Advanced FFS SA-VA Mixture generation Mixture generation Mixture generation Mixture generation FFS PS-VA VA IPS TN-TFT time Acronyms: TN = Twisted Nematic; IPS = In-Plane Switching; FFS = Fringe-Field Switching; VA = Vertical Alignment; PS-VA = Polymer-Stabilized Vertical Alignment; SA-VA = Self-Aligned Vertical Alignment

61 Liquid crystals of the IPS type are primarily used in TVs and touch screen displays Blue Phase Advanced FFS SA-VA FFS PS-VA VA Applications TVs, monitors, tablets, smartphones Description Improved viewing angle Particularly suitable for touch screens Trend Increase transmission of displays Reduce switching time Display cost reduction Orientation layer Glass substrate IPS Liquid crystals TN-TFT Polarizer

62 PS-VA is a premium liquid crystals technology that is mainly used in large TVs Blue Phase Advanced FFS Large TVs Applications Description SA-VA FFS PS-VA Fast switching High contrast Trend Increase transmission of displays Shorter processing time of displays Display cost reduction VA IPS TN-TFT Orientation layer Liquid crystals ITO layer Glass substrate Reactive mesogen Polarizer

63 FFS The key new liquid crystals technology to be used in touch screen displays Blue Phase Advanced FFS SA-VA FFS PS-VA PS-VA VA IPS Applications TVs, tablets, smartphones Description Improved viewing angle Particularly suitable for touch screens Higher transmission Trend Increase transmission of displays Reduce switching time Orientation layer Liquid crystals Glass substrate TN-TFT ITO layer Polarizer

64 Continuous improvement in line with our customers roadmaps a snapshot of our line extensions Innovation of singles Basis for new technologies and product line extensions Q Q Q Q Single A Single B Single C Single D Single E Single F Single G Single H Single I Single J R&D evaluation Start sampling Launch

65 Liquid crystals of the SA-VA * type simplify panel manufacturing SA-VA fact sheet Technology improvement PS-VA SA-VA Glass plate 1 Glass plate 2 Glass plate 1 Glass plate 2 Alignment Step 1 Step 2 Elimination of alignment steps LC filling process LC filling process Assembly and sealing Assembly and sealing All-in-one solution for customers: Unchanged quality with full compatibility to PS-VA process and key display materials USP Elimination of process steps leading to lower costs and in turn to higher margins or more competitively priced end products No conversion of production equipment necessary Status 55 inch TV prototype made in 2011 In development and tests with key display customers in South Korea and Taiwan Earliest launch: 2014 depending on customer decision * SA-VA = Self Aligned Vertical Alignment

66 Blue Phase technology can significantly reduce display costs while improving picture quality Blue Phase fact sheet Technology Blue Phase Improve switching times to <1 ms 3D Color sequential Elimination of color filters Higher transmission Elimination of black mask Higher resolution Cost savings Lower energy consumption Cost savings Higher transmission USP Potential to eliminate display components Lower energy consumption Status First TV prototype made in 2013 In development with one key display customer Earliest launch: >2015 depending on customer decision Still several technological barriers to overcome

67 A strong and balanced R&D portfolio, addressing future needs of the display industry Added value Merck innovation portfolio in Liquid Crystals Blue Phase advanced FFS SA-VA Characteristics Balanced R&D portfolio managed by key innovation criteria Time to market Added value Commercial potential Potential for differentiation IP position Market entry Concepts Phase I Feasible projects Phase II Running projects Phase III Bubble size: Chance of success Projects with higher commercial viability

68 4K2K: The trend for larger displays drives the need for higher resolutions, stimulating demand for PS-VA Full HD TV Ultra High Definition TV (UHD) Impact on Merck Full HD 1,920 x 1,080 pixel 13 pixel per inch x 4 Full HD 1,920 x 1,080 pixel Full HD 1,920 x 1,080 pixel Full HD 1,920 x 1,080 pixel Full HD 1,920 x 1,080 pixel 52 pixel per inch Major trend towards larger display sizes (>50 inch) Customers focus on exploiting potential of current liquid crystal technologies Shifts commercial adaption of new liquid crystal technologies Creates opportunities for reactive mesogens 1,920 x 1,080 3,840 x 2,160 Increasing end-user demand for 4K2K devices supports our technologies, fuels replacement cycle

69 Agenda The Merck R&D engine in display materials Drivers of liquid crystal display development The role of liquid crystals in display development Liquid crystals beyond flat panel displays Summary

70 The unique characteristics of liquid crystals could further increase the range of applications Liquid crystals beyond 2020 Smart Windows Darkening of windows Smart energy glass Light and display New lighting concepts Convergence of light and display New optical features Haptic displays Holography Smart Antennas Mobile data management Chemistry evolves, tending to find its own applications

71 Smart windows can offer significant added value to the operating cost of modern buildings Smart windows Challenges today Merck solution Green performance Architectural design Smart windows Double skin facade Sun shades, take away real estate Single skin facade with liquid crystal shading: Same performance Less material and weight More floor area No maintenance Freedom of design for premium architecture

72 Agenda The Merck R&D engine in display materials Drivers of liquid crystal display development The role of liquid crystals in display development Liquid crystals beyond flat panel displays Summary

73 Merck well-positioned to meet current and future innovation needs Merck has been the innovation leader Merck continues to strive for innovation upgrades today and in the future Merck ongoingly seeking out new end-applications for liquid crystals in displays and beyond

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75 OLED Status quo and Merck s position Merck Information Day 2013 A Deep Dive into Merck s LC&OLED Business Dr. Udo Heider Vice President OLED Darmstadt, Germany June 26, 2013

76 Agenda OLED at Merck and basics OLED vapor versus printing Merck s perspective on OLED Strategic update and position Summary

77 We start from strong platforms Merck position in display materials Commercial platform in display materials No. 1 in liquid crystals with >60% market share Innovation leader in display materials Highly flexible and cost-leading operations OLED activities Strong IP position with high research output Broad R&D cooperation with academia and industry Systematic R&D for OLED in vapor and printing Technology platform in display materials ~500 people in R&D with a powerful budget of > 100 m Broad R&D approach across display value chain: LC, RM, phosphors, OLED State-of-the-art know-how Established and strong collaborations with all display makers Research centers and development hubs in key regions, close to customers

78 OLED: A fundamental part of our R&D strategy for more than a decade Merck OLED development history OLED activities in Mainz 2001 Schott & IBM Project Luminescence Technologies OLED today 2007 Merck acquired Project Luminescence Technologies First white OLED lighting designs for ambient lighting New strategy from component manufacturer to material supplier OLED activities in Frankfurt 2010 Merging of both in Darmstadt ~80 R&D experts M&S experts in all 4 key countries 1992 Hoechst AG R&D Project ~1,400 patents Covion GmbH established 100% subsidiary of Avecia Ltd. Commercial 100% subsidiary of Merck KGaA production 2007 Integration into Merck KGaA

79 OLEDs are carbon-based light-emitting components Fundamentals of liquid crystals versus OLED Advantages of OLED Liquid crystals - Light Modulation OLED - Light Generation OLED displays versus liquid crystal displays Slightly thinner Electrodes Light Source Light Source OLED Electrodes 3 6 V Slightly lighter OLED: A fully controllable micro light bulb with the correct color in every pixel

80 Our focus is to provide solutions for the full OLED stack, addressing all layers Setup of a typical OLED stack Cathode nm Metal Human hair ~400x thinner 3-6 V EIL 20nm ETL 20 nm HBL 10nm EML 20-40nm HTL 20nm HIL nm Electron Injection Electron transport Hole Blocking Emission Red, Green, Blue (Matrix 95% +Emitter5%) Hole Transport Hole injection Merck target Transparent Anode Indium tin oxide Interaction of layers determine OLED performance

81 OLED can be used for display as well as lighting applications Merck OLED application fields Flexible displays Curved surfaces Non-breakable Lighting OLED lighting concepts Wallpaper Non-flexible displays Very thin Low energy consumption Transparent New applications Combining displays and lighting OLED is more than just TVs

82 While further production capacities for OLED will be built, their overall level will remain low near-term Display surface area [km²] Announced OLED production capacities for displays Taiwan Display production capacities by surface area in South Korea Samsung Display South Korea LG Display OLED < 5% LCD, Plasma, CRT > 95% Japan China OLED is more than just TVs Source: DisplaySearch Quarterly FPD Supply/Demand & Capital Spending Report, Q1 2013, AMOLED, year-end capacities with likelihood >=30%

83 Agenda OLED at Merck and basics OLED vapor versus printing Merck s perspective on OLED Strategic update and position Summary

84 The development of OLED displays already started 20 years ago, gaining momentum only recently Small display segment Premium TV segment (> 47 ) Consumer TV segment (> 37 ) Vapor 11 TV 15 TV Smartphones 55 > 47 > 37 Printing Producer >2015 passive matrix active matrix OLED from premium products to general consumer market as technology and process hurdles are overcome

85 Today, two technologies are used for the commercial production of OLED displays: RGB and White Today's commercial manufacturing processes for OLED Technology type Production process RGB Display and lighting OLED Vapor deposition Small molecules RGB White Small molecules white with color filter While white OLED is easier to manufacture today, RGB OLED is likely to offer higher energy efficiency Acronyms: RGB = Red, green and blue

86 The vapor process for RGB OLED production has a limited intrinsic yield Chemical vapor deposition (CVD) process 1 OLED waste Step 1: Application of red emission layer Red OLED source Vacuum box Fine metal shadow mask Deposition yield: <30% Substrate Significant loss of red OLED material due to deposition on mask

87 The vapor process for RGB OLED production has a limited intrinsic yield Chemical vapor deposition (CVD) process 2 OLED waste Step 2: Application of green emission layer Green OLED source Vacuum box Fine metal shadow mask Deposition yield: <30% Substrate Significant loss of green OLED material due to deposition on mask

88 The vapor process for RGB OLED production has a limited intrinsic yield Chemical vapor deposition (CVD) process 3 OLED waste Step 3: Application of blue emission layer Blue OLED source Vacuum box Fine metal shadow mask Deposition yield: <30% Substrate Significant loss of blue OLED material due to deposition on mask

89 RGB OLED vapor process is attractive for small displays but is challenging for large displays Characteristics of Chemical Vapor Deposition (CVD) process for RGB OLED Pros Cons Established and well controllable process High resolution possible Limited substrate size due to challenges arising from handling of large metal masks High amount of waste due to need for masking Successful in small devices Limited scalability Uneven deposition of material RGB OLED production based on chemical vapor deposition can hardly be cost competitive to LCD

90 Printing is a proven technology for the targeted deposition of materials Technology of printing Printer head OLED - Ink Polymer bank TFT ITO Substrate Due to targeted deposition, little waste is created in the printing process Acronyms: TFT = Thin-film transistor; ITO = Indium tin oxide

91 OLED printing: A scalable and efficient production technology for displays, but still in its infancy Characteristics of printing process Pros Cons Very efficient use of materials with high throughput Scalability to large areas No established process for mass production yet Requires availability of technology and corresponding inks Less complex process Open technology access RGB OLED production based on printing has the chance to be cost competitive to LCD

92 OLED printing can solve the waste dilemma and the size limit of the RGB vapor process Characteristics of OLED production technologies Chemical vapor deposition OLED material waste Printing >70%? 2012 price per square inch: ~$10 US * 2014 price per square inch: ~$5 US * No targeted deposition of OLED materials on substrate inefficient material use high costs CVD <5% Printing Targeted deposition of OLED materials on substrate very efficient material use lower costs * Source: Display Search, Quarterly Worldwide Flat Panel Forecast Report, Q1 2013

93 Agenda OLED at Merck and basics OLED vapor versus printing Merck s perspective on OLED Strategic update and position Summary

94 If OLED technology advances further, it could gain meaningful share in the TV market Market forecast for OLED surface area OLED market Surface area [km²] OLED lighting Mobile PC/Phone OLED OLED TV Today, small displays play dominant role for OLED Additional growth driver for OLED could be TVs OLED lighting is expected to play a meaningful role from 2020 onwards ~10-15% of total display market OLED could capture ~10-15% of the total display market by 2019 Source: DisplaySearch, Quarterly Worldwide Flat Panel Forecast Report, Q1 2013; Nanomarkets, Special Report for: The FlexTech Alliance - OLED Lighting Markets, May 2012

95 RGB printing has technological advantages compared to rivaling RGB vapor process Comparison of OLED printing versus OLED vapor deposition Processing Performance Materials Advantage Performance Materials Challenge Printing Scale to large area Less complex process High material utilization High production yield High throughput Open technology access No established production technology for OLED yet Vapor deposition Established state-of-the-art Suitable for ultra high resolution Scale to large area Production yield Complexity of process

96 Due to its scalability, OLED printing has the potential to enter the large display mass market Small displays Medium and large displays (TVs) Mass market (display surface) Vapor High costs per square inch compensated by high prices for devices Challenging production yields today create significant barriers to enter the mass market Printing If technological hurdles are overcome, an attractive cost-per-inch² ratio could serve the whole display market mass market ready Time

97 Alliance of Merck and EPSON creates significant momentum in development of OLED printing Merck s commercialization roadmap of OLED printing Positioned for OLED printing leadership Development process Q1 2010: Joint development with EPSON Current status: First OLED TV prototypes made Testing commercial production Merck s position in OLED printing Consolidated market Merck one out of ~3 players Merck s position in OLED vapor Q2 2009: Project start Cooperation with EPSON/TEL Fragmented market Merck among ~10 players Step change in OLED printing technology Combined expertise creates highway to OLED printing Combining Merck s strong expertise in display materials with Epson s strength in printing Time We have positioned ourselves to become market leader in OLED printing

98 Agenda OLED at Merck and basics OLED vapor versus printing Merck s perspective on OLED Strategic update and position Summary

99 OLED takes the same strategic approach that has proven successful for liquid crystals Value-adding strategy in liquid crystals and OLED Single material supplier Limited development scope Highly depending on customer pull Solution provider Difficult to exchange Differentiation by performance Can stimulate customer push Accelerates technology development triple win for customer, consumer and provider Liquid Crystal Strategy Liquid crystal single material Translate chemistry into physics Customized liquid crystal solution OLED Strategy OLED material Added value Customized OLED full stack

100 Transition to solution provider maximizes value for Merck and its customers Transitioning from supplying materials to providing solutions Value potential Strategy rationale Be ready to move if market comes Careful spending according to market development Increase technical success by focus Common strategy Concentration of development on few layers with good IP base Material supplier Full stack strategy Address all layers and combinations Understand the overall device Optimize the combination of materials Strategy rationale Address needs of customers directly Be a competent partner Speed up development Achieve sustainable technical position (beyond IP in singles) Be ready for printable technology Solution provider Time

101 Agenda OLED at Merck and basics OLED vapor versus printing Merck s perspective on OLED Strategic update and position Summary

102 If OLED takes off in large displays and lighting, Merck is ready to participate Powerful commercial and technology platforms in display materials Strong position in OLED vapor and printing Merck is ready to capture the OLED opportunity

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104 Appendix

105 White OLED displays: Higher yields in the vapor process, but also higher energy consumption Characteristics of Chemical Vapor Deposition (CVD) process for white OLED Pros Cons Established and well-controllable process Highly complex stack High resolution possible Uneven deposition of material Successful in small devices ~2/3 of light intensity held back by color filters No need for masking White OLED displays: easier to manufacture, but even less differentiation to LCD than RGB OLED

106 LCDs A high hurdle for new large display technologies Merck Information Day 2013 A Deep Dive into Merck s LC&OLED Business Dr. Thomas Kietzke Director Strategy and Market Intelligence Darmstadt, Germany June 26, 2013

107 Agenda LCD and OLED displays: Status quo Strengths of LCDs versus strengths of OLED displays Market projections for LCDs versus OLED displays Summary

108 LCDs and OLED displays are fundamentally different Setup of a Liquid Crystal Display Setup of an Organic Light Emitting Diode display Polarizer Glass substrate ITO film Unpolarized white light TFT Orientation film Liquid crystal ITO film Glass substrate Orientation film Color filter Polarizer 1. Backlight (CCFL or LED) emits white light 2. Color filters transform white light into RGB colors 3. Liquid crystals block or enable light transmission Liquid crystals selectively modulate light 1. OLEDs convert electric energy into RGB light, a separate OLED material is needed for each color OLEDs directly generate light Acronyms: ITO = Indium Tin Oxide; TFT = Thin-Film Transistor; CCFL = Cold Cathode Ion Source; LED = Light-Emitting Diode; RGB = Red-Green-Blue

109 LCDs have squeezed all other large display technologies nearly out of the market Market share by display technologies LCD leadership foundation Relative display surface area 100% 80% 60% 40% 20% ~93% For consumers Price and thinner frames Higher resolution in all sizes Proven track record of extreme reliability For manufacturers Price and scalability Production capacities Production costs 0% LCD Plasma OLED CRT LCDs have created highest technological and commercial entry barriers Source: DisplaySearch, Quarterly Worldwide Flat Panel Forecast Reports

110 Despite the launch of an 11 inch device already in 2007, OLED TVs are still very expensive rarities 11 Sony 15 LG 55 LG 55? 2007 Price of OLED TV Price of OLED TV Price of OLED TV Price of OLED TV ~ $80 per square inch ~ $25 per square inch ~ $10 per square inch ~$5 per square inch Price of LCD TV Price of LCD TV Price of LCD TV Price of LCD TV ~ $4 per square inch ~ $1.5 per square inch ~ $1 per square inch < $1 per square inch The progress in OLED TV development is still uncertain Source: DisplaySearch, Quarterly Global TV Shipment and Forecast Report, Q1 2013

111 Past market research overexcited, underestimating challenges in commercial production Market research estimates for OLED TV sales after each OLED TV introduction Analysis in [units] 2010 Estimate 1,186, Estimate 2013 Estimate First commercial launch of an 11 inch OLED TV in 2007 Financial crisis in 2009 held back investments in OLED technology 2010 Actual 247, Actual 683,000 Until today, sales of OLED TVs were always significantly behind initial expectations 1,070 3? 2007 Display Search 2010 Display Search 2012 Display Search After 11 OLED After 15 OLED After 55 OLED Estimates Actuals After each OLED TV launch there has been overexcitement in the market Source: DisplaySearch

112 Agenda LCD and OLED displays: Status quo Strengths of LCDs versus strengths of OLED displays Market projections for LCDs versus OLED displays Summary

113 Future advancements of LCDs will further raise commercial as well as technology barriers for OLED Expected development of average sales price of large displays by technology Key drivers of LC development Cost reduction Cost/ inch² Reduction of display components LCD OLED Higher transmission Faster tact time in production Progress in technology Larger displays Higher resolution (e.g. 4K2K) Higher color gamut time Immersive 3D * Based on white OLED

114 Though OLED TVs may lower the cost gap to LCDs, significant technology barriers remain Agenda of technology development in the display industry Display trend Larger displays Technology Requirements LCD TV OLED TV * Scalable production technology Status for Higher resolution (4K2K) 4x higher pixel density Higher color gamut Narrow emission light source Immersive 3D Holography mass production technologically possible, not available yet technologically impossible * RGB OLED

115 High quality and low cost of LCD TVs limit significant near-term cannibalism from OLED Key characteristics of displays Characteristic Customer relevancy LCD versus OLED Picture quality Long-term reliability Maximum size Display thickness Energy consumption * Cost Pro OLED Pro LCD Key takeaways Picture qualities of LCDs and OLED displays at similar high levels Unknown lifetime of OLED displays versus LCD (>15 years) Maximum size of LCDs two times larger than of OLED displays Thickness of LCD displays only ~1 mm thicker than OLED display OLED TVs prices significantly higher: ~ $10,000 versus ~$1,500 for 55 inch TVs OLED TV displays are not a revolution and are not highly differentiated * Based on white OLED

116 Agenda LCD and OLED displays: Status quo Strengths of LCDs versus strengths of OLED displays Market projections for LCDs versus OLED displays Summary

117 The overall display market is expected to continue growing in volumes ~140 Display industry forecast Display surface area [km²] CAGR ~ 6-7% ~215 Display growth Flat panel display surface area expected to continue growing in the next years Average growth mid to high single digits driven by various trends Regional growth in Emerging Markets Increase in average display size New display features (e.g. 3D, 4K2K) Flat panel display surface area expected to increase by >50% until 2019 Source: DisplaySearch, Quarterly Worldwide Flat Panel Forecast Report, Q1 2013; CAGR = Compound Annual Growth Rate

118 LCD expected to remain the dominant display technology until 2019 and beyond Display industry forecast by technology Display surface area [km²] % 96% 92% % LCD technology position LCD technology expected to dominate TV market for many years to come Customer needs well met Proven technology with high level of maturity and reliability Strong cost leadership Plasma likely to exit market while OLED expected to emerge LCD-TV CRT Plasma OLED Market penetration of OLED TVs impacted by comparatively high prices Source: DisplaySearch, Quarterly Worldwide Flat Panel Forecast Report, Q1 2013

119 Relative to LCD, production capacities of OLED displays will remain at moderate levels mid-term Display surface area [km²] Display industry forecast by annual production capacities Display trends LCD capacities expected to increase along with anticipated growing demand Build-up of OLED production capacities in line with anticipated penetration of the display market, staying <5% in 2015 No commercial emergence of additional display technologies expected LCD Plasma OLED Moderate market uptake of OLED displays confirmed by build-up of production capacities Source: DisplaySearch, Quarterly FPD Supply/Demand & Capital Spending Report, Q1 2013

120 OLED can provide a unique selling point in rollable displays Display potential of LCDs versus OLED displays Display form factor Relative market share* LCD OLED Non-flexible Bendable/Curved Rollable - + Due to a favorable price-benefit ratio, LCDs are likely to dominate a large part of the display market * Company estimate

121 Agenda LCD and OLED displays: Status quo Strengths of LCDs versus strengths of OLED displays Market projections for LCDs versus OLED displays Summary

122 OLED displays are much more likely to enlarge the display market mid-term rather than replace LCDs LCD is likely to remain the dominant display technology at least until 2020 OLED needs to overcome significant technology challenges to gain substantial display market share OLED has its highest potential for differentiation in applications where LCD is not used

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124 Liquid Crystals Sustained value contribution Merck Information Day 2013 A Deep Dive into Merck s LC&OLED Business Matthias Zachert Chief Financial Officer Darmstadt, Germany June 26, 2013

125 Agenda Key criteria for long-term success Financial valuation: Food for thought Conclusion

126 Four key criteria for long-term success Market position Market trends Innovation Sustained value

127 Merck Liquid Crystals - Strong leadership position in a dynamic and attractive niche market Market position No. 1 with ~50-60% market share for many years No LC market shares Market trends Innovation Fulfilling all customer needs: Customer proximity, broadest technological platform, fast reaction time, high quality No.2 No.3 Sustained value Pioneer since the early days of liquid crystals

128 Current trends and customer needs clearly favor liquid crystal technology Market position Merck display technologies well-positioned to fulfill current and future consumer needs LCD area demand by application * 179km 2 Market trends TVs getting bigger as consumers increasingly buy larger TVs; driving volumes 113km 2 141km 2 Innovation Current and future consumer trends such as 3D, 4K2K, tablets and smart TVs drive growth Sustained value New features increase replacement cycle, also supporting volume growth E 2017E Desktop Monitor Mobile PC Others LCD TV * Source: DisplaySearch Q1 13; Others include: mobile phones, public displays, car navigation and others

129 Liquid crystals are not only restricted to display applications Market position Market trends Innovation Sustained value Innovation is key in a fast-moving and cost-pressured consumer electronics market Merck enabler of many display technology changes in last decades, approached as solution provider on a regular basis At the customers front door, Merck has customer trust and access Pipeline well-filled with new technologies such as SA-VA, Blue Phase, advanced FFS and projects beyond displays Illustration

130 A setup to maintain and expand value long-term Market position Market trends Innovation Premium position in chemical space with respective margins and valuation potential Liquid Crystals: positive terminal value OLED: natural hedge Combination of both technologies: potentially strong team-up Momentum Potential evolution of Merck display materials business LC growth + OLED growth = growth in display materials Merck liquid crystal activities LC flat + OLED growth = growth in display materials Merck OLED activities natural hedge Potential LC decline + OLED growth = stable display materials Time Sum of liquid crystals & OLED Projected development of the flat panel display market by display type [$ bn] 250 Sustained value Market position, future demand potential, innovation and pipeline stand for long-term value of the Liquid Crystal business * Source: Transparent Display Technology and Market Forecast, Displaybank, Apr. 2011

131 Agenda Key criteria for long-term success Financial valuation: Food for thought Conclusion

132 Unique business setup, value chain position and premium margins should lead to respective valuation Chemical value chain Margins Multiples Main differentiators Positioning in chemical value chain Uniqueness EBITDA pre margins Valuation multiples?

133 Merck in the sweet spot of the chemical value chain Chemical value chain Margins Multiples Oil and gas exploration Petrochemicals Bulk chemicals Specialty chemicals BASF Lanxess Evonik Dow Chemical Bayer Material Science Clariant Altana High-value-added chemicals Croda Givaudan Novozyme Symrise Source: Own research

134 Merck with unique profitability Chemical value chain Margins Multiples EBITDA pre margin - Performance Materials versus peers Peer mean: ~24% Merck A B C D * Analyst research reports

135 Merck s unique position leads to superior margins Chemical value chain Margins Multiples Innovation leader Consolidated market First mover when introducing new technologies/product extensions Only two competitors Leadership Economies of scale Customer proximity Market share in the last years >50% Most competitive production costs Enables close customer focus and safeguards future innovation Premium EBITDA margin

136 Highly differentiated business model - valued so far as a conventional chemical business Chemical value chain Margins Multiples Bulk chemicals Margins 10-15% Multiples 2 6x 7x Differentiation Specialty chemicals Margins 15-20% Multiples 2 7x 8x Premium High value added chemicals High-valueadded chemicals Margins Margins % >40% Multiples 2 Multiples 2 11x -12x 8x 11x Bulk chemicals Speciality chemicals EV/EBITDA multiples Degree of differentiation not fully reflected in the usually applied valuation multiples Source: Thomson Reuters, research reports and own research; 1 On Performance Materials EBITDA pre 2 EV/EBITDA 2014

137 Agenda Key criteria for long-term success Financial valuation: Food for thought Conclusion

138 Strong positions in liquid crystals and OLED provide natural hedge in the display materials business Potential evolution of Merck display materials business Possible developments Momentum natural hedge OLED displays can be an additional LC growth + OLED growth = growth in display materials LC flat + OLED growth = growth in display materials Potential LC decline + OLED growth = stable display materials growth driver for Merck s display materials business In the case of increasing cannibalism between OLED and liquid crystal displays, Merck could benefit either way Time New technological applications and OLED provide natural hedge Merck liquid crystal activities Merck OLED activities Sum of liquid crystals & OLED

139 Merck Liquid Crystals: A sustained value driver Market position Leading market position in attractive high-margin market Market trends Consumer needs and consumer trends drive future demand Innovation Merck has a proven track record of innovation and natural hedge with OLED Sustained value Display business will continue to be a long-term value driver for Merck

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