Management Report

Bayer MaterialScience

Bayer MaterialScience	2006	2007	Change
	€ million	€ million	%
Sales	10,161	10,435	+2.7
Materials	2,925	3,041	+4.0
Systems	7,236	7,394	+2.2
Sales by Region
Europe	4,402	4,585	+4.2
North America	2,622	2,376	-9.4
Asia/Pacific	2,007	2,229	+11.1
Latin America/Africa/Middle East	1,130	1,245	+10.2
EBITDA¹	1,499	1,542	+2.9
Special items	(178)	(64)
EBITDA before special items²	1,677	1,606	-4.2
EBITDA margin before special items	16.5%	15.4%
EBIT¹	992	1,042	+5.0
Special items	(218)	(75)
EBIT before special items²	1,210	1,117	-7.7
Gross cash flow¹	1,166	1,228	+5.3
Net cash flow¹	1,281	1,147	-10.5

1 for definition see Bayer Group Key Data.
2 for definition see also Calculation of EBIT(DA) Before Special Items.

MaterialScience enjoyed further growth in sales in 2007. Sales rose by 2.7 percent to €10,435 million (2006: €10,161 million). Currency- and portfolio-adjusted sales advanced by 6.2 percent, due primarily to higher volumes in both segments. In addition, we were able to raise prices slightly overall.

EBITDA before special items came in at €1,606 million, slightly below the prior-year level of €1,677 million. We largely succeeded in offsetting the markedly higher costs for petrochemical raw materials and energies and the negative shifts in currency parities through higher volumes and selling prices. EBIT before special items fell by 7.7 percent to €1,117 million (2006: €1,210 million). We initiated an extensive restructuring program in the fall of 2007 to improve cost structures and further increase efficiency, taking special charges of €75 million for these measures. In the previous year we took special charges of €218 million, which were mainly litigation-related. After special items, EBIT rose by 5.0 percent to €1,042 million.

Materials

Materials	2006	2007	Change
	€ million	€ million	%
Sales	2,925	3,041	+4.0
Polycarbonates	2,720	2,811	+3.3
Thermoplastic Polyurethanes	205	230	+12.2
Sales by Region
Europe	1,100	1,139	+3.5
North America	599	574	-4.2
Asia/Pacific	947	1,037	+9.5
Latin America/Africa/Middle East	279	291	+4.3
EBITDA¹	448	273	-39.1
Special items	0	0
EBITDA before special items²	448	273	-39.1
EBITDA margin before special items	15.3%	9.0%
EBIT¹	289	100	-65.4
Special items	0	0
EBIT before special items²	289	100	-65.4
Gross cash flow¹	364	237	-34.9
Net cash flow¹	324	183	-43.5

1 for definition see Bayer Group Key Data
2 for definition see also Calculation of EBIT(DA) Before Special Items

Sales in the Materials segment moved ahead by 4.0 percent to €3,041 million (2006: €2,925 million) thanks to significantly higher volumes, especially in Asia. Sales climbed by 7.9 percent on a currency- and portfolio-adjusted basis. The Polycarbonates business unit increased sales by 3.3 percent to €2,811 million, and by 8.0 percent when adjusted for shifts in currency parities. Our Thermoplastic Polyurethanes business unit saw sales rise by 12.2 percent to €230 million. This figure contains the business of the Taiwanese group Ure-Tech, a leading supplier of thermoplastic polyurethanes in the Asia-Pacific region, from July 1, 2007. We have thus significantly strengthened this business unit and achieved a leading market position worldwide. After adjusting for currency- and portfolio-effects, sales of the Thermoplastic Polyurethanes business unit grew by 6.4 percent.

EBITDA before special items fell by a substantial 39.1 percent to €273 million. Earnings were diminished by declining margins due to higher petrochemical raw material and energy costs coupled with lower selling prices that the growth in volumes did not compensate. EBIT dropped by 65.4 percent to €100 million.

Systems

Systems	2006	2007	Change
	€ million	€ million	%
Sales	7,236	7,394	+2.2
Polyurethanes	5,182	5,224	+0.8
Coatings, Adhesives, Sealants	1,488	1,598	+7.4
Inorganic Basic Chemicals	403	423	+5.0
Other	163	149	-8.6
Sales by Region
Europe	3,302	3,446	+4.4
North America	2,023	1,802	-10.9
Asia/Pacific	1,060	1,192	+12.5
Latin America/Africa/Middle East	851	954	+12.1
EBITDA¹	1,051	1,269	+20.7
Special items	(178)	(64)
EBITDA before special items²	1,229	1,333	+8.5
EBITDA margin before special items	17.0%	18.0%
EBIT¹	703	942	+34.0
Special items	(218)	(75)
EBIT before special items²	921	1,017	+10.4
Gross cash flow¹	802	991	+23.6
Net cash flow¹	957	964	+0.7

1 for definition see Bayer Group Key Data.
2 for definition see also Calculation of EBIT(DA) Before Special Items.

Sales of our Systems segment came in at €7,394 million, up 2.2 percent from the prior-year figure of €7,236 million. To strengthen the forward integration of the Polyurethanes business unit, we acquired a systems house business in Dubai and another in the United States, sales of which were included for the first time in 2007. Currency- and portfolio-adjusted business expanded by 5.5 percent on account of higher volumes and selling price increases. All business units grew sales in Asia and Europe. Business was down in North America, with sales to the automotive and construction industries particularly affected.

Sales of the Polyurethanes business unit edged ahead by 0.8 percent to €5,224 million. Currency- and portfolio-adjusted sales grew by 4.2 percent. Coatings, Adhesives, Sealants saw sales improve by a gratifying 7.4 percent to €1,598 million, and by 10.9 percent on a currency-adjusted basis. Sales of Inorganic Basic Chemicals moved forward by 5.0 percent to €423 million, and by 7.3 percent when adjusted for shifts in exchange rates.

EBITDA of the Systems segment before special items advanced by 8.5 percent to €1,333 million (2006: €1,229 million), with higher selling prices and volume gains more than offsetting increased costs for petrochemical raw materials and energy. EBIT before special items climbed by 10.4 percent to €1,017 million. We took special charges of €75 million in 2007 for our restructuring program, particularly the closure of our diphenylmethane diisocyanate (MDI) production facility in New Martinsville, West Virginia, United States. The previous year’s figure contained special charges of €218 million, resulting primarily from an arbitration proceeding in the United States relating to the production of propylene oxide. After special items, EBIT improved by 34.0 percent to €942 million (2006: €703 million).